Policymakers want to wait to see how the labour market reacts following the end of its furlough scheme.
The Bank of England (BoE) surprised analysts on Thursday by keeping interest rates unchanged, saying it needs more time to gauge how the end of a programme that paid furloughed workers during the coronavirus pandemic will impact the nation’s jobs market.
“The short-term evolution of the labour market will be crucial in determining the scale and pace of the response,” BoE Governor Andrew Bailey said during a press conference following the central bank’s decision. “We do not yet have the necessary hard evidence on the state of the labour market following the end of the furlough scheme to make a sufficiently clear assessment. Over coming months that is likely to change.”
Thursday’s decision to keep the bank’s main interest rate at its all-time low of 0.1 percent surprised analysts and investors given surging energy and food prices that have contributed to an overall spike in inflation.
The vote by the BoE’s Monetary Policy Committee was 7-2 in favour of keeping the benchmark rate as is. The two policymakers who voted for a 15 basis-point rate hike said it was needed to offset domestic and global cost pressures, according to the meeting’s minutes.
The seven BoE policymakers who voted against a hike said there was “value” in waiting to see where the jobs market lands after the government ended a salary programme “before deciding when a tightening in monetary policy might be warranted”.
The United Kingdom’s government had paid 80 percent of the salaries of employees furloughed or sent home without work due to COVID-19 restrictions. At the height of lockdowns, the programme supported over 11 million people.
While Thursday’s decision dashed expectations for a rate increase, the BoE signalled a rate rise could soon be in the cards if the UK economy continues to recover as expected.
Financial markets responded quickly to the rate decision, with the British pound selling off against other currencies. It was down 1 percent against the dollar.
Holding back on interest rate hikes places the BoE in line with some other major monetary policymakers around the world. The European Central Bank and United States Federal Reserve recently said they would also leave interest rates unchanged. The Fed did however say on Wednesday that it would start scaling back its bond-buying programme that has helped support the economy during the pandemic.
The BoE’s new forecasts pictured weaker British economic growth with the forecast for 2022 cut to 5 percent from a previous 6 percent. It also predicted that inflation would jump to 5 percent in April 2022, driven by high energy prices.
