In Review: Interest rates in 2021 -
interest rate review

In Review: Interest rates in 2021

This article was published before the decision to increase interest rates on 16th December. You can read’s coverage of that decision here.

Even though UK base rates have been 0.1% since 19 March 2020, 2021 has been one of the more dramatic/controversial years for fiscal policy. We will now look at the seven MPC meetings held during 2021 as we move towards the end of the year and the last meeting on 16 December. It is crucial to consider base rates against inflation, a serious issue over the previous few months.

UK inflation rate

As you’ll see from the 12-month inflation chart below, UK inflation has risen from 0.3% in November 2020 to a staggering 4.2% in October 2021. Ironically, yesterday the Bank of England announced that inflation in the UK could “comfortably exceed” 5% in 2022.

chart showing uk inflation



Historically, interest rates have been a tool used to combat inflation. However, the Bank of England, despite admitting inflation could hit 5%, seems reluctant to act.

Let’s look at this year’s MPC meetings and what was discussed. This year’s meetings have taken place on the below dates:

  • Thursday 4 February
  • Thursday 18 March
  • Thursday 6 May
  • Thursday 24 June
  • Thursday 5 August
  • Thursday 23 September
  • Thursday 4 November
  • Thursday 16 December

While many experts believe that the December MPC meeting could be the most dramatic of 2021, time will tell!

Confusion, U-turns, misguidance and a deteriorating reputation

The Bank of England has historically been highly regarded by investment markets and economists worldwide. Unfortunately, since Mervyn King ended his term in office as the governor of the Bank of England in 2013, the bank’s reputation has been tarnished somewhat. We will now look at each MPC meeting during 2021, drawing out the most critical comments and actions (or non-actions).

MPC meeting: Thursday 4 February

The main pointers to consider from this meeting were as follows:

  • Unanimous vote to maintain base rates at 0.1%
  • Unanimous vote to maintain the quantitative easing programme
  • UK GDP under pressure but more robust than expected
  • Inflation expected to hit 2% in spring 2021
Related article:   Inflation “could hit 15% this winter”

Interestingly, in this MPC meeting, there were concerns that inflation could fall and the UK could slip into negative interest rates.

MPC meeting: Thursday 18 March

In the March MPC meeting, the main decisions were as follows:

  • Unanimous vote to maintain base rates at 0.1%
  • Unanimous vote to continue with quantitative easing programme
  • Unanimous vote to increase quantitative easing programme to £895 billion
  • Inflation again expected to hit 2% in spring 2021
  • First mention of an increase in energy prices

In the March MPC meeting, concerns were expressed about inflation and how this could fall. In addition, the mass media picked up on the idea of negative interest rates as a means of encouraging investment. Savers were not happy!

MPC meeting: Thursday 6 May

Some differences of opinion began to emerge in the May MPC meeting with the more critical takeaway points including:

  • Unanimous vote to maintain base rates at 0.1%
  • Majority vote to maintain quantitative easing programme
  • Inflation expected to exceed 2% towards the end of 2021
  • Further concerns were expressed about the threat of higher energy prices

Even though energy prices had begun to increase and concerns were expressed, there was no indication of what was to follow regarding inflation.

MPC meeting: Thursday 24 June

In what were difficult times in which to project GDP, the MPC meeting discussed expectations of a strong recovery in 2021. The main points agreed in the MPC meeting were as follows:

  • Unanimous vote to maintain interest rates at 0.1%
  • Majority vote to maintain quantitative easing programme
  • MPC members expect inflation to exceed 3% temporarily
  • As well as concerns regarding energy prices, commodity price increases are discussed

Amidst concerns about “spare capacity in the economy”, the MPC is adamant there will be no tightening of monetary policy before this spare capacity is eliminated.

Related article:   Plunging pound leads to calls for emergency rate hike

MPC meeting: Thursday 5 August

During the August MPC meeting, concerns were expressed regarding supply constraints, and higher-than-expected consumer demand as economic activity increased. The significant decisions from the August MPC meeting were as follows:

  • Unanimous decision to maintain base rates at 0.1%
  • Majority decision to continue with the quantitative easing programme
  • Concerns the Covid Delta variant could reduce global economic growth in Q3
  • Inflation hit 2.5% in June, 0.8 percentage points higher than the May report expectations
  • Energy prices and the cost of goods expected to push inflation to 4%
  • Expectations that supply/demand of goods and services will return to broadly balanced
  • Effective discount of short-term challenges, focusing on the medium-term

Looking back at some of the early MPC meeting notes, opinions were expressed regarding an increase in base rates if inflation exceeded 2%. However, having hit 2.5%, a significant 0.8 percentage points higher than expectations expressed in May, there were concerns the MPC was giving mixed signals to financial markets.

MPC meeting: Thursday 23 September

As the year progressed, economists expressed severe criticism about non-action by the MPC on interest rates, with inflation effectively out of control. The main pointers from the September MPC meeting were as follows:

  • Unanimous vote to maintain base rates at 0.1%
  • Majority vote to maintain quantitative easing programme
  • Spare capacity has been replaced by excess demand, placing pressure on prices/inflation
  • Expectations that inflation would hit 4% in Q4 of 2021 were again noted
  • Signs of persistent upward pressure on costs, leading to the increased price of goods
  • Acknowledgement of further expected upward pressure in wholesale gas prices

MPC members stated that high inflation was simply part of a transitional period out of the Covid pandemic and back to some kind of “normality”. The City disagrees!

MPC meeting: Thursday 4 November

The November MPC meeting saw the emergence of varying opinions across MPC members. While this is natural as monetary policy begins to move in a different direction, some members chose to discuss their views in the press. The main factors to take away from the November meeting were as follows:

  • Majority decision to maintain base rates at 0.1%
  • Majority decision to maintain quantitative easing programme
  • Signs of significant disruption in supply chain impacting GDP growth
  • Energy prices continue to rise
  • Slight dip in inflation seen as temporary, expected to rise above 4% in October
  • Forecast that inflation would hit 4.5% in November – maintained through the winter period
  • Inflation now expected to peak at 5% in April 2022
  • Inflation expected to fall back in second half of 2022
Related article:   Base rate ticks higher: Household incomes squeezed further

Recent suggestions that inflation could “comfortably exceed” 5% in 2022 suggest that the November MPC meeting expectations are now out of date.

Mixed signals and a reluctance to increase base rates

It is only fair to remember that during the early part of 2021, there was still significant uncertainty concerning Covid and how this would impact economic growth and inflation. That said, on numerous occasions the Bank of England indicated that an interest rate rise was inevitable. However, the emergence of the Omicron variant of Covid has prompted some MPC members to suggest an interest rate rise may now be put on hold.

During 2021, UK inflation has increased from 0.7% to 4.2%, with no change in Bank of England base rates. While we live in unprecedented times, during a period with any degree of normality, this non-action would be unthinkable. So will we finally see an increase in base rates on or before the December MPC meeting? What level will inflation hit in 2022?

Historically, the Bank of England has been world-renowned for being decisive, quick-acting and forward-thinking. However, since Mervyn King left the bank in 2013, it is safe to say there has been damage to this previously bombproof reputation.

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