Discount rate kept at 0.1% in unexpected MPC vote

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“It is only a matter of time before the base rate is raised, with many expecting that to happen today.”

Economists had predicted the bank rate would rise to 0.25% as inflation continues to rise. Inflation hit 3.1% in September, with the CPI expected to average 4% next year.

However, the MPC has always charted a path for the bank rate to reach around 1% by the end of 2022, estimating “that it will be necessary over the next few months to increase the bank rate in order to bring CPI inflation down to the 2% target in the long term “.

In its minutes, the MPC said: “There will be occasions when inflation deviates from target due to shocks and disruptions. In recent unprecedented circumstances, the economy has been subjected to very significant shocks. Given the lag between monetary policy changes and their effects on inflation, the Committee, in judging the appropriate stance, will focus as always on the medium-term inflation outlook, including inflation expectations. in the medium term, rather than on factors likely to be transitory.

“At its recent meetings, the Committee considered that a slight tightening of monetary policy over the forecast period is likely to be necessary to sustainably achieve the 2% inflation target over the medium term. The latest developments, put in parallel with the updated projections of the Committee, reinforce this point of view. Nonetheless, short-term uncertainties remain, in particular regarding the outlook for the labor market and the extent to which domestic cost and price pressures persist over the medium term. “

In last week’s budget, Chancellor Rishi Sunak revealed that he had written to the Governor of the Bank of England to “remind them of their commitment to keep inflation low”.

Sunak said: “I wrote to the Governor of the Bank of England today to reaffirm their mandate to achieve low and stable inflation, and people need to be reassured that they have a strong track record in this area. “

Luke Bartholomew, senior economist at abrdn, said: “The decision to keep rates unchanged today will certainly surprise some investors, as the Bank has done little to ward off growing speculation about an impending hike. We expect a rate hike in December, when policymakers have at least some provisional evidence of job performance after the holiday expires. And indeed, further rate increases next year. The message to investors, therefore, is that rate hikes are coming soon, but should not cling too closely to every talk and talk by rate setters. “

Nathan Emerson, Managing Director of Propertymark, commented: “It is only a matter of time before the base rate is raised, with many expecting that to happen today.

“When it does, mortgage rates will inevitably rise, but it’s important to keep things in perspective as the cost of borrowing remains low from historical levels.

“Above all, the market remains in a strong position to deal with the hikes mentioned above, with our latest housing market report showing an increase in both the average number of sales and buyers on books. “

Ed Monk, Associate Director of Fidelity International, said: “It seems inevitable that the Bank of England will raise rates at some point, but borrowers have so far been granted a stay. The MPC appears in a wait and see mode as supply chain problems and rising global energy prices – factors beyond the Bank’s control – push inflation up.

“A delay in raising rates is a signal of the conundrum facing rate regulators. They will be uncomfortable that inflation is well above the target, but will also understand that they have limited options for reducing price increases. Maintaining rates at their current low emergency level shows that the Bank still views growth as fragile.

“Households need to be prepared for higher borrowing costs that come at some point. Coupled with rising price inflation for everyday items like fuel and energy, and with rising national insurance and ongoing frozen income tax rates, household budgets are cropped in several directions. The financial cost of a 0.25% rate hike, each time it happens, may be small, but the change in consumer sentiment it causes can be much larger. “

Hayley Scott of Investec Real Estate added: “It seems like the right decision. The economy is still in recovery mode and the GDP has not yet regained all the ground lost from the Covid. It is important to note that the full impact of the end of the leave is not yet visible and, despite the government’s insistence, the reintroduction of Covid restrictions cannot be ruled out.

“However, if the labor market holds up and the recovery does not stall, a first rate hike in the coming months is almost inevitable and will be increasingly necessary. The pressure on developers from building cost and wage inflation continues to grow, while there are few winners from soaring house price inflation.

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