Monetary Policy Committee meeting, Bank of England 6/5/2021

A more upbeat note from the Bank of England, but inflation risk understated.

The Bank of England’s Monetary Policy Committee voted unanimously to keep
interest rates at 0.1%, but there was one dissenting voice in the vote to continue with
its existing programme of UK government bond purchases, financed by the issuance
of central bank reserves. Furthermore, although the overall amount of planned asset
purchases remains unchanged, the Bank will only purchase £3.4b. of assets per week
from May until August 2021, a reduction from the weekly purchases of £4.4b. in the
first four months of the year. With growing evidence that the UK’s economic recovery
is gaining momentum, the lack of new initiatives is unsurprising and there has been
no mention of negative interest rates for several months now.

The MPC expects consumer price inflation rapidly to rise to its 2% target and indeed
to overshoot it later in the year, but still has no medium to long term expectations of it
remaining at much above the 2% level. In a press release following today’s meeting,
the MPC stated that it “does not intend to tighten monetary policy at least until there
is clear evidence that significant progress is being made in eliminating spare capacity
and achieving the 2% inflation target sustainably.” No mention was made of the
ongoing high level of broad money growth. In the first quarter of 2021, UK M4X
broad monetary aggregate grew at an annual rate of 9.7%. While this is lower than the
figures of 12% seen at the start of the year, it is still very high by recent standards and
the Institute of International Monetary Research expects that inflation will be notably
higher and sustained than the Bank of England’s current forecasts. The reduction in
the rate of asset purchases is a welcome development, but given the rate of broad
money growth, there seems no valid reason for continuing with them at all.

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