Cloudy outlook to prompt MPC to hold fire on rates and QE

A slowing economic recovery from the Covid-19 crisis, sharp energy price rises and tax hikes squeezing Brits’ household incomes are likely to prompt the Bank of England’s committee of rate setters to err on the side of caution today.

The Bank’s monetary policy committee (MPC) will announce its latest decision on rates and the fate of its bond buying programme at noon. Both are predicted to stay unchanged.

Threadneedle Street’s top officials will take note of strong headwinds facing the UK economy as the country moves into the autumn and winter months, according to economists.

The UK economy grew just 0.1 per cent in July, according to the Office for National Statistics (ONS), much lower than experts’ predictions.

The ONS said retail sales dipped 0.9 per cent in the same month, suggesting the boost the UK economy received from a sudden burst in spending as Covid-19 measures were scrapped is receding. Increasing national insurance by 1.25 percentage points is also expected to weigh on growth.

Inflation recorded its highest ever monthly percentage point increase on an annual basis, jumping to 3.2 per cent from two per cent, further eating into real household income. 

Sandra Horsfield, economist at Investec, said: “There is virtually no doubt that the Bank rate will be kept on hold at 0.10 per cent. It is almost as certain that this will again be a unanimous decision.”

The general market consensus is the Bank will hike rates in February next year. Investors expect the Old Lady to raise rates 15 basis points, with a further 25 basis point hike priced in for the second half of next year too.

“There’s little incentive for the Bank to unnecessarily tie its hands by endorsing a particular timeline this week,” economists at ING said.

The latest round of MPC meetings are the first to have included Andy Haldane’s successor, Huw Pill.