The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 2 November 2021, the Committee judged that the existing stance of monetary policy remained appropriate. The MPC voted by a majority of 7-2 to maintain Bank Rate at 0.1%. The Committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20 billion. The Committee voted by a majority of 6-3 for the Bank of England to continue with its existing programme of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these government bond purchases at £875 billion and so the total target stock of asset purchases at £895 billion.

So that is the headline and broad outline above and seems entirely consistent with what has been telegraphed over the recent months.  Namely that central banks globally see inflation driven by post virus reopening and supply chain issues and whilst CPI is looking high central banks have all stood by the same transitory narrative.  That jars with some - notably Bild where the German tabloid attacked ECB's Lagarde as "Madam inflation" after the ECB left rates unchanged several days ago.  The Fed confirmed its unchanged Fed funds rate yesterday [although it will start to taper its asset purchase program] and so with asset purchase target maintained at the BoE a raise in rates would have been surprising.

Why is there this indifference to inflation?  Well its because the global view on growth is that it is somewhat restrained by disruption in supply chains. Alongside the rapid pace at which global demand for goods has risen [post virus], this has led to supply bottlenecks in certain sectors. There have also been some signs of weaker UK consumption demand. While bottlenecks will continue to restrain growth somewhat in the near term, global and UK GDP are nonetheless expected to recover further from the effects of Covid-19 (Covid). UK GDP is projected to get back to its 2019 Q4 level in 2022 Q1.

There has also been some effect on real rates by some of the stronger jawboning on inflation in Q3.   In the United Kingdom, market-implied expectations for the path of Bank Rate over the year ahead had increased sharply since the MPC’s September meeting, which appeared to reflect market participants’ perceptions of a further rise in inflationary pressures and recent MPC communications about the policy outlook. Most market contacts were expecting the Committee to raise Bank Rate to 0.25% by the end of the year, with expectations for the exact timing finely balanced between the November and December MPC meetings. The November Report was conditioned on a market-implied path for Bank Rate, based on the 15-working day average to 27 October, that rose to around 1% by the end of 2022. In the immediate run-up to the MPC’s November meeting, the market-implied path for Bank Rate had reached around 1.3% by the end of next year. Market contacts had noted that diminished market liquidity meant that it had become more difficult to infer a central path for Bank Rate expectations.

Lending rates on mortgages with loan-to-value (LTV) ratios higher than 75% had continued to fall since the September meeting, despite the increases in risk-free rates. The associated relatively sharp narrowing in mortgage spreads was in part likely to reflect the typical lagged response of mortgage rates to movements in risk-free rates, and so, all else equal, this effect would be expected to reverse to some extent. Perhaps consistent with that, there had been a rise in lending rates on some mortgage products with LTV ratios at or below 75% recently. The latest Credit Conditions Survey had suggested that unsecured credit conditions for households had continued to loosen somewhat.

In fairness central banks could not have made their intentions more clear.  They will not risk re-railing economic recovery by moving early and whilst we might have some parts of the economy that are and have gone very well, namely Tech there are some sectors that have only in the last weeks started to emerge from the pandemic - think airlines, pubs, restaurants and some have only just emerged from their job furlough schemes.

Lets face it no amount of rate movement is going to make Taiwan make more semi-conductors for autos, it won't get more truck drivers to take petrol to the pumps or goods to the shops, it won't get more natural gas into Europe and it won't get more chickens or pigs through the slaughter houses.

Recent focus on energy prices [almost exclusively USD denominated] and their impact upon inflation makes the move in GBPUSD today even more painful...