It is fair to say that Andrew Bailey, Governor of the Bank of England, is not held in very high esteem by economists at the moment. So before we look at predictions for UK base rates in 2022, we thought it might be interesting to consider some of the confusing and contradictory comments made by Bank of England MPC members during 2021.
Date: 20 June 21
Even as far back as June, there was growing pressure on the Bank of England to increase base rates. However, despite comments to the contrary, nothing happened.
Date: 15 July 2021
Fast forward to July 2021, and Andrew Bailey acknowledges the challenges of inflation but says that he “won’t be rushed into interest rate decision”. Is he being stubborn or sensible?
Date: 27 September 2021
In September, the mood changes within the Bank of England with “market guidance” suggesting that interest rates would increase. When the increase failed to materialise, to say that the market was disappointed is an understatement, especially with inflation expected to hit 4% later in the year.
Date: 27 October 21
As we move to the end of October, the Chancellor of the Exchequer became involved in the discussion. Under existing statutes, the Chancellor is obliged to contact the Bank of England if inflation is more than one percentage point outside of the bank’s target. Before the November MPC meeting, there were high hopes that interest rates would finally start to move. No change again!
Date: 5 November 2021
Comments after the November MPC meeting report was released saw the Bank of England immediately talking up interest rates, despite voting for no change at the meeting. So, after the Bank of England governor suggested “rates will rise” and the markets were ready, why no action?
In addition, The Guardian reported serious concerns within financial markets regarding the recent mixed messages from the Bank of England. Many now believe “market guidance” is a thing of the past, and the Bank of England’s reputation is shot.
And finally, despite no change in interest rates from the November MPC meeting, mortgage companies have had enough. Even though UK base rates remained unchanged at 0.1%, UK lenders began to increase mortgage rates. We have also seen the vast majority of sub-1% mortgage deals disappear. Is the tail wagging the dog?
Date: 15 November 2021
Yet more concerns about inflation but no action on UK base rates. The most recent Bank of England forecast suggests that inflation will top 5% in early 2022. What more motivation does the Bank of England need to increase base rates?
Date: 26 November 2021
In what many believe could be the start of infighting within the MPC, one member openly discusses a tightening of monetary policy. As we await the December MPC meeting report, can we expect more members of the MPC to follow suit?
When considering all of the recent derogatory headlines regarding the Bank of England and Andrew Bailey, this one sums up the feeling amongst economists. Despite recognizing that inflation was out of control some months ago, no action has yet been taken. So while many expect the December meeting to result in an increase in UK base rates, time will tell.
The spectre of inflation
While it is fair to say that the Bank of England has no direct control over energy prices, one of the main factors behind an increase in inflation, there are other aspects to consider. These include a rapid recovery from the coronavirus pandemic, local supply chain issues and a tight employment market resulting in significant wage inflation. Is cheap finance still fueling the recovery?
Inflation is expected to peak at 5% in 2022. Interestingly, despite expectations of interest rate rises over the next 12 months, inflation is still likely to exceed the Bank of England’s 2% target at the end of 2022.
Expectations for UK base rates
It is fair to say that expectations for UK base rates during 2022 are “live” and subject to much speculation and movement. However, many experts still believe that UK base rates will be around the 1% mark in 2022, with an increase expected sooner rather than later (possibly as soon as December). The FT’s graph shows the market consensus towards the end of October 2021.
Before the November MPC meeting, many people would have bet their house on an increase in base rates. Consequently, after deciding on a no-change policy, the Bank of England has come under immense pressure. It is effectively taken for granted that UK base rates will increase as a consequence of the December MPC meeting – although we could see movement any day now. However, could recent events rein in expectations of an increase in base rates?
Could the Omicron variant delay an expected increase in base rates?
Over the last few days, we have seen the UK government tightening regulations regarding the wearing of masks and additional precautions after the discovery of a new Covid-19 variant. There are concerns that the Omicron variant is more infectious, has numerous mutations, and may avoid current vaccine protection. These concerns saw an initial 3% fall in the UK and US stock markets, with investors unsure about the immediate future. So what is the consensus today?
As we await further information regarding the Omicron variant, many people are now starting to factor in a worst-case scenario. This has seen GDP growth revised downwards over the last few days. Many now expect the return of restrictions to curtail consumer spending, and reduce pressure on wage inflation. While there is still the enormous challenge of energy prices, this may take the edge off consumer inflation and reduce pressure to increase base rates.
Will interest rates finally rise in 2022?
Before discovering the Omicron variant, it seemed almost inevitable (although we have been here before) that UK base rates would increase in December and into 2022. In light of criticism in early November, and a refusal to increase base rates, the Bank of England seemed to go on the offensive. In a rather unfortunate quirk of fate, the Omicron variant may force the Bank of England to become even more cautious and possibly delay the expected increase in base rates. Another U-turn!
Who would be an MPC member in the current environment?