Bank of England set to keep stimulus pumping despite inflation rebound

By William Schomberg

LONDON (Reuters) – The Bank of England is expected to keep its huge support for Britain’s economy running at full speed on Thursday, despite a strong recovery from its pandemic slump and a jump in inflation.

However, the central bank might also start to lay out its plan for how it will eventually reverse its stimulus.

With more than 70% of adults in Britain now fully vaccinated against COVID-19 and most social-distancing rules lifted, Britain’s economy has recouped much of its 10% crash of 2020 and is on course to match the United States and grow at the fastest pace among big rich nations this year.

Inflation jumped to 2.5% in June and the BoE will say in a new set of forecasts that it is on course to rise even further about its 2% target in the months ahead.

But economists polled by Reuters expect the BoE will keep its benchmark interest rate at its all-time low of 0.1% and leave its bond-buying programme on course to reach its 895 billion-pound ($1.24 trillion) target size by the end of this year.

Two policymakers have said the time is approaching for the removal of some of the BoE’s stimulus, echoing calls by some members of the U.S. Federal Reserve which is facing an even sharper rise in inflation.

But most of the BoE’s other rate-setters have said the acceleration in price growth is likely to prove transitory as economies around the world kick back into life.

The bigger risks, they say, are that unemployment rises more sharply than expected as finance minister Rishi Sunak’s jobs subsidies are phased out by the end of September, and that the recovery buckles due to the spread of the Delta variant of the coronavirus.

But with British gross domestic product likely to return to its pre-pandemic size by the end of this year or early in 2022, the BoE wants to start explaining how it will start to wean the economy off its unprecedented levels of support.

BoE officials have said they will publish “soon” new guidance on how they might sequence raising rates with reducing the bond stockpile.

Many economists expect the plan will be announced on Thursday.

Options include not reinvesting the cash from maturing bonds or actively selling bonds, possibly around or shortly after the time that the BoE starts to raise rates – something investors expect to happen in about a year’s time.

“This is of course relevant for markets, but the BoE has also been under increasing political pressure to justify its balance sheet policy amid rising inflation and its interaction with fiscal policy,” JPMorgan economist Allan Monks said.

Last month, a committee in the upper house of parliament called on the BoE to explain why it was not curtailing its bond-buying in the face of rising inflation. Its chair said the BoE was “addicted” to the programme.

($1 = 0.7193 pounds)

(Writing by William Schomberg; Editing by Alexander Smith)

By William Schomberg

LONDON (Reuters) – The Bank of England is expected to keep its huge support for Britain’s economy running at full speed on Thursday, despite a strong recovery from its pandemic slump and a jump in inflation.

However, the central bank might also start to lay out its plan for how it will eventually reverse its stimulus.

With more than 70% of adults in Britain now fully vaccinated against COVID-19 and most social-distancing rules lifted, Britain’s economy has recouped much of its 10% crash of 2020 and is on course to match the United States and grow at the fastest pace among big rich nations this year.

Inflation jumped to 2.5% in June and the BoE will say in a new set of forecasts that it is on course to rise even further about its 2% target in the months ahead.

But economists polled by Reuters expect the BoE will keep its benchmark interest rate at its all-time low of 0.1% and leave its bond-buying programme on course to reach its 895 billion-pound ($1.24 trillion) target size by the end of this year.

Two policymakers have said the time is approaching for the removal of some of the BoE’s stimulus, echoing calls by some members of the U.S. Federal Reserve which is facing an even sharper rise in inflation.

But most of the BoE’s other rate-setters have said the acceleration in price growth is likely to prove transitory as economies around the world kick back into life.

The bigger risks, they say, are that unemployment rises more sharply than expected as finance minister Rishi Sunak’s jobs subsidies are phased out by the end of September, and that the recovery buckles due to the spread of the Delta variant of the coronavirus.

But with British gross domestic product likely to return to its pre-pandemic size by the end of this year or early in 2022, the BoE wants to start explaining how it will start to wean the economy off its unprecedented levels of support.

BoE officials have said they will publish “soon” new guidance on how they might sequence raising rates with reducing the bond stockpile.

Many economists expect the plan will be announced on Thursday.

Options include not reinvesting the cash from maturing bonds or actively selling bonds, possibly around or shortly after the time that the BoE starts to raise rates – something investors expect to happen in about a year’s time.

“This is of course relevant for markets, but the BoE has also been under increasing political pressure to justify its balance sheet policy amid rising inflation and its interaction with fiscal policy,” JPMorgan economist Allan Monks said.

Last month, a committee in the upper house of parliament called on the BoE to explain why it was not curtailing its bond-buying in the face of rising inflation. Its chair said the BoE was “addicted” to the programme.

($1 = 0.7193 pounds)

(Writing by William Schomberg; Editing by Alexander Smith)