Bank of England in central London.
AFP via Getty ImagesThe Bank of England’s policy-setting Monetary Policy Committee will have a choice at its meeting on Thursday: strike a hawkish tone like the U.S. Federal Reserve recently did, or sound dovish like the European Central Bank usually does?
Concerns about the pickup—or not—of inflation will be at the center of the meeting, and even though the BoE is expected to maintain its current policy—keeping its key rate steady at 0.1% and the ceiling of its asset-buying program unchanged at £895 billion ($1.25 trillion)—the tone and nuances of its communication will be scrutinized by markets.
The dilemma is the same as the one faced by all central banks in western economies, adapted to the current pace of the U.K. economy’s recovery: Is it now the time not only to worry but to act—or announce action—to nip inflation in the bud?
On one hand, growth keeps exceeding forecasts. And inflation, for the first time in nearly three years, shot above the Bank of England’s annual 2% target last month. As all central bankers insist, this may be due to temporary causes—such as the fast rise of energy prices compared with their depressed levels of last year, and current major supply-chain bottlenecks. But the longer the trend endures, the higher the risk that households and businesses will start anticipating higher levels of inflation in the future—and there lies the risk.
On the other hand, the world and the U.K. economy aren’t done with the Covid-19 pandemic-induced economic crisis. The recovery is strong but fragile, and the delta variant, now the main cause of infections in the U.K., has started spreading in Europe as well as in the U.S. That means in the short term longer delays before economies can reopen in full, and in the medium term the risk of new economic slowdowns—without even mentioning the risk of new, vaccine-resistant variants in the future.
The Bank of England has already slowed somewhat the weekly pace of its quantitative-easing program, due to expire at the end of the year. And its governor Andrew Bailey has indicated that it will not raise rates before it starts unwinding the program and reducing the bank’s balance sheet.
Thursday will be the last meeting of BoE chief economist Andy Haldane, who was the only member of the nine-strong MPC to vote at the last meeting for a cut of the asset-buying program, and who said recently that inflation was now a “dangerous” risk for the U.K. economy. His departure, however, should not change the MPC’s balance much. But even more dovish member Gertjan Vlieghe now sees a possibility that the Bank might decide to raise rates as soon as the first half of next year—whereas analysts usually didn’t expect a move before late 2022.
The BoE has given less guidance to the markets than the Fed or the ECB on the criteria that would guide its action in the coming months. It seems happy to reiterate after each meeting that it will always do whatever is necessary to deal with whatever circumstances. Analysts and investors will have to scrutinize adverbs and adjectives to find out on Thursday whether it is leaning, cautiously in any case, toward the hawkish or the dovish sides of the central bankers’ traditional spectrum.
Write to Pierre Briançon at pierre.briancon@dowjones.com
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