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Finely poised Bank of England meeting set to show divisions

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·Senior City Correspondent, Yahoo Finance UK
·4-min read
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Michael Saunders, member of the Monetary Policy Committee, Bank of England, appearing before Treasury Select Committee at the House of Commons, in London to answer questions on the Bank's inflation reports. Photo: PA
Michael Saunders, member of the Monetary Policy Committee, Bank of England, appearing before Treasury Select Committee at the House of Commons, in London to answer questions on the Bank's inflation reports. Photo: PA

Policy setters at the Bank of England (BoE) will deliver their latest verdict on monetary policy on Thursday, with the decision likely to lay bare a growing division among top economists at the central bank.

Bank-watchers expect the Monetary Policy Committee (MPC) to leave the UK's interest rate unchanged at 0.1% but committee members are likely to be split on whether to maintain the current programme of bond buying.

At the start of the COVID-19 pandemic, the Bank announced plans to buy £895bn($1.2tn)-worth of bonds under a programme of quantitative easing meant to support and stimulate the economy. Now, some members of the MPC worry the stimulus is in danger of overheating the economy and short-circuiting the UK's economic recovery.

Watch: What is inflation and why is it important?

"Compared to the previous (May) forecasts, the latest readings on inflation are much higher, GDP is a bit higher and unemployment has, yet again, fallen rather than risen," Brian Hilliard, an economist at Societe Generale, said. "This has to make the MPC less relaxed about its majority view that the inflation surge is transitory."

Two members of the Bank's rate setting committee — deputy governor Sir Dave Ramsden and external member Michael Saunders — have given recent speeches suggesting QE should be halted early to stop inflation running out of control. The Bank of England is still schedule to spend £50bn on bonds by the end of 2021. 

Analysts expect one or both of Ramsden and Saunders to vote to end QE. The vote will be symbolic but ultimately futile.

Read more: Inflation and 'pingdemic' hobble UK's services rebound

"We think it’s pretty unlikely that the Bank will scale back its QE programme early," said James Smith at ING. "In reality it won’t make much difference to the economy either way, though an early end does risk setting a precedent for future QE packages. The announcement of a new bond-buying package in the future may be less potent if investors were to factor in the possibility of the scheme being wound up early."

While the current pace and scale of QE is not expected to change, investors will be watching for any hints of how the programme will be unwound. 

"This will likely be the main focus for markets next week," said Sanjay Raja at Deutsche Bank. "While there's a lot of uncertainty as to what strategy the MPC will finally settle on, one thing is for certain: the Committee will be shoring up flexibility to prioritise tackling the Bank's bloated balance sheet earlier on in the tightening cycle."

File photo dated 20/09/19 of the Bank of England, in the City of London. The Bank of England will give its latest verdict on interest rates and the economy on Thursday amid a growing split among policymakers over the threat of soaring inflation as growth rebounds. Issue date: Sunday August 1, 2021.
The Bank of England. Photo: PA

The Bank of England never offloaded the bond portfolio it build up after the 2008 financial crisis due to self-imposed rules around where interest rates had to be before it could sell off the assets. Economists expect those rules to be tweaked to allow Threadneedle Street to begin shrinking its massive balance sheet as the economy improves.

"The Bank Rate threshold at which the MPC would be willing to embark on a quantitative tightening programme will be dropped, allowing the Bank to tighten policy, when the time comes and should it wish, by simultaneously raising rates and reducing its asset holdings," said George Buckley, an economist at Nomura.

Read more: 'War for talent' will fuel inflation debate at Bank of England

The Bank of England will publish updated forecasts for the economy alongside its monetary policy decisions. The projections are likely to show even higher growth expectations for this year, with analysts penciling in growth of 7.5% to 8% in 2021. 

Even still, analysts think Andrew Bailey and his colleagues will sound a cautious note on the outlook for the UK economy. They are likely to highlight ongoing uncertainty around the Delta variant of COVID-19.

Elsewhere, BoE is likely to confirm that negative interest rates are now ready to be used. The central bank began preparatory work on sub-zero interest rate policy last year and told private banks to prepare their systems. Threadneedle Street wanted to have negative rates in its toolkit incase economic growth failed to pick up following the COVID-19 pandemic. The recent path of the UK economy means they now look unlikely to be used.

Watch: Why can't governments just print more money?

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