Signal of UK Base Rate Hike? ... Inflation Forecast Revised Upward

Base Interest Rate and Quantitative Easing Policy Remain Unchanged

Andrew Bailey, Governor of the Bank of England (BOE)
Photo by Reuters Yonhap News

[Asia Economy Reporter Byunghee Park] The Bank of England (BOE), the central bank of the United Kingdom, significantly raised its year-end inflation forecast from 2.5% to 4.0% at its monetary policy meeting on the 5th (local time). Although it decided to keep the base interest rate unchanged and maintain its quantitative easing policy, it is being evaluated that the BOE has started to create an atmosphere for a rate hike next year.

According to major foreign media, the BOE unanimously decided to keep the base interest rate at 0.1% during the monetary policy meeting. Regarding the quantitative easing policy to purchase assets worth 150 billion pounds by the end of this year, the BOE also decided to maintain the current policy with an overwhelming vote of 7 in favor and 1 against.

Although the current monetary policy was maintained, the majority of monetary policy committee members expressed the view that economic conditions have met the criteria to resume discussions on raising the base interest rate. They added that a gradual monetary tightening will be necessary to control inflation over the next two years. BOE Governor Andrew Bailey explained that the upward revision of the inflation forecast reflects consideration of the risks posed by high inflation. He expects excess demand to persist for a considerable period next year. However, Governor Bailey said that the current inflation rise is expected to be temporary. He emphasized, "Energy prices will not rise further, and as supply chain disruptions ease, inflation will decline next year."

Market participants expect the BOE to raise the base interest rate next year. It is anticipated that the BOE will raise rates before the central banks of the United States and the Eurozone.

Krishna Guha, Vice Chairman of Evercore ISI, commented, "The BOE appears to have taken a more hawkish stance than expected, creating an atmosphere for a shift toward tightening." He added, "The BOE seems to have judged that the negative impact of the Delta variant on third-quarter growth will be minimal in the short term."

After the BOE monetary policy meeting results were released, the pound-dollar exchange rate traded around $1.39 per pound without significant fluctuations.