Record jump in inflation fails to stir the Bank of England

Laith Khalaf
23 September 2021

•    The Bank of England has maintained interest rates at 0.1%, and the QE programme at £895 billion
•    That’s despite latest ONS figures showing a record monthly jump in CPIH inflation
•    The Bank concedes the gas price crunch has elevated inflationary risks
•    Inflation is now expected to rise to over 4% this winter and remain above that level well into next year
•    November meetings of the US Fed and Bank of England could prompt a fireworks party in markets

Laith Khalaf, head of investment analysis at AJ Bell:

“A record jump in inflation has not stirred policy makers at the Bank of England, who are steadfastly maintaining the mantra that price rises are transitory. That doesn’t mean they will be short-lived however. The Bank expects inflation to hit 4% this winter and still to be above 3% this time next year, so consumer pockets and cash savings are still going to take a big hit. The Bank has also conceded that the gas price crunch has elevated inflationary risks heading into 2022.

“While savers will continue to grimace as their cash loses its buying power, the continuation of the low interest rate environment is a blessing for borrowers and a key driver of the boom in UK house prices. Markets are now pricing in an interest rate hike in the spring, but even if that transpires, it will still only leave base rate at 0.25%. The QE programme will still loom large over proceedings too, as the Bank has said it won’t start reducing the bonds on its balance sheet until base rate reaches at least 0.5%. The direction of travel for interest rates is inevitably upwards, but the pace of change will be glacial, unless inflation really takes off and puts central banks under serious pressure.

“Markets generally remain fairly sanguine about the prospect for slowly tightening monetary policy, both here and in the US. The ten-year gilt yield currently stands at 0.8% and the ten year US Treasury a little higher at 1.3%. Meanwhile equity markets are still buoyant, despite a recent wobble precipitated by the Evergrande crisis. Market participants can be astonishingly short term in their thinking however, and we could still see some shakeout when policy tightening is actually announced. 

“The beginning of November now looks like the next tipping point which will cause markets to pause for breath, as both the US Fed and the Bank of England could set out their tightening plans. Fed Chairman Jay Powell has indicated that QE tapering could easily begin at the November meeting, and the Bank of England will finally have employment data to look at that isn’t distorted by the furlough scheme, which is still propping up the jobs of 1.7 million workers. Until then, central banks are still playing the same tune, and investors are happy to keep on dancing, with little regard to what happens when the music stops. But if central banks do signal tighter policy at the beginning of November, we can expect some fireworks.”

Laith Khalaf
Head of Investment Analysis

Laith Khalaf started his career in 2001, after studying philosophy at Cambridge University. He’s worked in a variety of roles across pensions and investments, covering both the DIY and the advised sides of the business. In 2007, he began to focus on research and analysis, and has since become a leading industry commentator, as well as a regular contributor to the financial pages of the national press. He’s a frequent guest on TV and radio, and for several years provided daily business bulletins on LBC.

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