- The Bank of England has held rates at 0.1% and maintained the QE programme at £895bn
- That’s despite revising GDP forecasts up and now expecting inflation to tip over 3%
- The debate between inflation and deflation is evenly poised, but investor portfolios probably aren’t
Laith Khalaf, financial analyst at AJ Bell, comments:
“Inflation is already above target and the UK economy is racing along, but the Bank of England isn’t taking its foot off the accelerator just yet. That’s because the inflation numbers are comparing activity now with this time last year, when the shock and scale of the pandemic was just sinking into the UK economy. We will only really be able to get an idea whether inflation is a flash in the pan or not at the back end of this year, at which point talk of transitory factors will be starting to wear thin.
“There is almost unanimous consensus in the Bank’s policy setting committee, with only the outgoing Andy Haldane raising a small hand of disagreement, by voting to curtail the QE programme at £845 billion. While there are certainly concerning bubbles appearing in some prices, the Bank has to balance the risk of stoking inflation against the possibility of puncturing the economic recovery. The Bank’s projections of contained inflation in the medium term are not without merit and there are still deflationary forces in today’s global economy, not least the possibility the pandemic may yet throw another curve ball that forces us to erect social barriers once again.
“However, the Bank’s forecasts do seem to be running behind the curve, with Q2 economic growth revised up by around 1.5% from a projection that was made just over six weeks ago. We can’t really blame the Bank for not nailing down such a dynamic and unpredictable situation, but it’s worth recognising that the data points on which monetary policy is being formulated are pretty shaky right now and subject to considerable change. Indeed, it’s notable the Bank now expects inflation to tick up over 3% in the short term, partly a result of the discounts provided by the Eat Out to Help Out scheme last summer.
“Like Schrödinger’s cat, inflation may be alive and well, or flat on its back, we just can’t tell which right now. However, it’s likely that after years of strong performance in assets like bonds and tech, which thrive in a low inflation environment, investors’ portfolios are under-prepared for an inflationary period and it would be wise to address that imbalance. Cash savers also need to brace themselves for more pain, because near-zero interest rates look here to stay for the foreseeable and even transitory inflation is going to mean cash in the bank losing its buying power.”
