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BoE holds rate at 0.1% – but what do market experts think?

Today, the Bank of England has announced that they will keep the UK Bank Base Rate at a historic low rate of 0.1% for the time being. Market watchers have been eagerly awaiting the decision as it is a policy tool which has such huge ramifications for the economy at large. Now we know that the MPC voted by a majority of 7-2 to maintain the rate, how has that decision been received by the investment and financial advice professions?

Below, 8 market experts share their reactions:

Katharine Neiss, Chief European Economist at PGIM Fixed Income:

“We expected the Bank of England to remain on hold at today’s meeting, primarily to see whether workers returning from furlough would get reabsorbed into the labour market. However, we do have record vacancies and increased fiscal spending, as announced by the Chancellor last week, so the decision was finely balanced.

“On inflation, there are several factors uniquely challenging for the Bank of England. First, the UK is a bit of a poster child for some of the supply chain disruptions seen globally – be it the energy crunch, the manufacturing crunch, and the labour market crunch related to Brexit. Secondly, the UK does not have a history of too-low inflation, like what we have seen in the US and the euro area. So, the Bank of England does not need to run the economy hot in order to re-anchor inflation expectations. That said, there are signs of cyclical weakness the Bank of England should be mindful of.

“It is going to be very challenging for the Bank of England, as well as other major central banks, to engineer a smooth transition from the extraordinary monetary policies we have seen over the pandemic period. The Bank of England will take a limited and gradual approach to ensure the economy can withstand a removal of some of this extraordinary support, without short-circuiting the nascent recovery.”

Rachel Winter, Associate Investment Director at Killik & Co:

“Although markets had priced in a 58% chance of a rate rise taking place this month, the Bank of England has chosen to leave rates on hold for the time being.

“This of course will be at the displeasure of many who are becoming increasingly worried about inflation. Despite a small drop in CPI in September from 3% to 2.9%, the inflation rate is still above the Bank of England’s 2% target, and furthermore the Office for Budget Responsibility expects it to remain high in 2022 and 2023.

“Although last week’s Budget promised to “protect the country from rising inflation and interest rates”, the pledge to raise the UK’s National Living Wage by 6.6% could contribute to an upwards inflationary spiral. The rise in wages could potentially force firms to raise prices, resulting in inflation and forcing employees to demand yet higher wages to cover the rising cost of living. An interest rate rise should put the brakes on demand and hopefully prevent inflation from rising further, and the Bank of England will no doubt be watching the situation incredibly closely.

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