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Bank of England keeps rate at 0.1% but Warns of Slower Growth and Higher Inflation

A unanimous decision to maintain the key rate at 0.1% was taken by the Monetary Policy Committee on Thursday. It seems though that the debate about the end of quantitative-easing program is at its peak, given that opposition to its asset buying has grown to two members, while in a similar meeting in August, this opposition was limited to just one person.

The last quarter of the year, BoE estimates, will see a peak of inflation at 4% noting that, “material rise in spot and forward wholesale gas prices will have an impact on the consumer-price index from April next year, when regulated prices will have to be adjusted”

What can make economic growth see the red arrows of decline?

  • Higher household energy prices

  • Rise of unemployment as the leave-on-absence program, during which the government paid part of employees’ wages during the Covid-19 pandemic, comes to an end soon and is expected to put pressure to wage growth. The BoE stated: “Key questions include how the economy will adjust to the closure of the furlough scheme at the end of September; the extent, impact and duration of any change in unemployment”.

  • Fiscal policies, which will be tighter the current year and the next one, with a blend of social spending cuts and higher taxes adding an extra burden on economic growth.

In a further statement, the Bank noted: “The economic developments since the August meeting, appear to have strengthened” and added, “some modest tightening of monetary policy over the forecast period was likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term.”

Key conclusion for investors

The tightening of monetary policy will highly depend on the job market behaviour in the coming months, when the government will end its furlough programme. Naturally, the primary asset classes across the board (equities, bonds, real estate, cash and currencies) are expected to be affected in the coming months.

(Written and edited by: The Decision Maker)


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