Has the Bank of England had a shaking hand? After a series of speeches suggesting that a rate hike was imminent, its monetary policy committee finally decided, Thursday, November 4, not to act. Its key rate remains at 0.1%, taking financial markets by surprise, which expected the British monetary institution to be the first major Western bank to decide on a hike. However, the measure was only postponed for a few months. “We believe that interest rates will have to increase modestly to bring inflation down to 2%”, warns the institution.
Two of the nine members of the monetary committee were in favor of action now. The others are also hesitant, says Andrew Bailey, the Governor of the Bank of England: “The decision was very close. “ The “Old lady of Threadneedle Street”, its nickname taken from the street where it is installed, faces the same embarrassment as other central banks. On the one hand, the inflation surge is evident, well above its 2% mandate. In the UK, it hit 3.1% in September, and is expected to hover around 4.5% by the end of the year, then rise to a peak of 5% in spring 2022, according to the Bank of England.
The surge in gas and oil prices, but also that of most durable goods, makes this trajectory inevitable. On the other hand, the economic recovery is more fragile than it appears. Certainly, growth will approach 7% this year in the United Kingdom, the strongest of the G7 countries, but this is a mechanical catching-up effect after the violent fall in 2020. For now, the economy has not quite returned to its pre-Covid-19 pandemic level. “Gross domestic product should return to its level from the fourth quarter of 2019 to the first quarter of 2022”, notes Mr. Bailey.
The flight would be transitory
Added to this is a complete vagueness that reigns on the labor market. The UK faces significant labor shortages in some sectors. The panic around empty petrol stations, caused by the lack of truck drivers to transport the fuel, gives the impression of an overheating economy. But other signals make the Bank of England hesitate. In particular, at the end of September, the British government put an end to partial unemployment, while 1 million employees were still benefiting from it.
None of the major central banks have yet followed those around the world which have raised their rates since this summer.
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