Economic Perspectives –
MPC August meeting: above-target inflation still expected to be “transitory”
The latest Perspective from Ruth Lea CBE, Economic Adviser to Arbuthnot Banking Group.
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses August’s MPC meeting:
- The MPC left the Bank Rate and the government bond purchases programme unchanged at their August meeting.
- MPC member Michael Saunders was the only MPC member to vote for a cut in the target stock of government bond purchases.
- CPI inflation was projected to rise to 4% in 2021Q4 (compared with 2½% in May), but above-target inflation was still expected to be “transitory”. CPI inflation was projected return to close to the 2% target in the medium term.
- The GDP forecasts were little changed. The Bank expects growth of 7¼% in 2021, 6% growth in 2022 and 1½% growth in 2023.
- The Bank noted that there were frictions in the labour market, marked by difficulties in matching available jobs and workers. And a key uncertainty in the forecasts was how the labour market will adjust to the end of the furlough scheme.
- The Bank noted that the “market path” for the assumed Bank Rate had tightened in since May. Bank Rate was seen at 0.1% in 2021Q3 in August (0% in May) and 0.2% in 2022Q3 (0.1% in May).
- The Monetary Policy Report discussed the MPC’s monetary policy tightening strategy. The MPC intended to begin reducing the stock of purchased assets (government bonds, rather than corporate bonds), by ceasing to reinvest maturing assets, when the Bank Rate had risen to 0.5%. In addition, MPC may consider actively selling some of the stock of purchased assets, but only once Bank Rate had risen to at least 1%.
Other UK data:
- Markit surveys for July suggested manufacturing, services and construction were still expanding strongly, though weaker than in June. Inflationary pressures remained a concern in all three sectors.
- The SMMT reported that car production was weak in July, adversely affected by the ongoing semiconductor shortage and the “pingdemic”.
- The Halifax reported that house prices rose by 0.4% (MOM) in July but annual growth eased to 7.6%, the lowest since March, after June’s 8.7%.
- Oil prices have slipped off their recent highs following the OPEC+ meeting of 18 July, at which production increases were agreed. Brent Crude exceeded $77pb in early July but had fallen to $70.7pb by 6 August. However, oil prices remain significantly above pre-pandemic levels.
Ruth Lea said “There were no policy changes at this week’s MPC meeting, as expected, and it can be added that the MPC appears in no hurry to raise Bank Rate. Unsurprisingly, the inflation forecast was revised higher, with 4% projected for 2021Q4. However, the MPC maintained the view that above-target inflation was expected to be “transitory”, partly because commodity prices were assumed to stabilise. But, even assuming they are correct in this assessment, it would seem prudent for the MPC to cut back the current bond purchasing programme (QE), given the strength of the economic recovery.”
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