Inflation is coming, says the Bank of England – but don't expect us to react

The Bank of England is confident we’ll see inflation, but says it’s going to keep interest rates where they are and carry on printing money. John Stepek explains what that means for you.

Bank of England
Bank of England: relaxed
(Image credit: © Simon Dawson/Bloomberg via Getty Images)

Yesterday, the Bank of England told us that it had no plans to raise interest rates nor to end its current money-printing activities early.

There was only one dissenter from the consensus. With frankly marvellous timing, we have the man responsible for that one dissenting vote – retiring chief economist, Mr Andy Haldane – on the MoneyWeek podcast, which you can listen to here right now.

Haldane tells Merryn all about his views on central bank-backed digital currencies and also gives an insight into how central bankers think about financial repression.

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So don’t miss that! (I’ll stick another link at the end in case you’d rather read the rest of Money Morning first).

Anyway – what did that whole Bank of England decision mean for our money?

The Bank of England reckons we’ll see inflation, but it’s not worried

Markets spent much of last week fretting about what the US Federal Reserve’s plans are for monetary policy.

They seem to have calmed down a little this week after realising that simply talking about talking about talking about raising interest rates is not necessarily the same thing as actually tightening monetary policy.

However, while the Bank of England is far less systemically important than the Fed, investors were curious to hear what the venerable central bank had to say about its own views on inflation and how that might affect interest rates.

After all, Britain does have a history of being more inflation-prone than most of the other major economies, while our successful vaccine roll-out should have given us a headstart in the recovery stakes (though our rather more tentative approach to ending lockdown might stifle that).

In any case, unlike the Fed, it looks as though the Bank of England actually surprised markets by being even less aggressive than expected.

The Bank announced that interest rates would stay where they are, at 0.1%. That was a unanimous decision and entirely expected. It also decided that it will keep printing money until it has done all of the promised £895bn quantitative easing. The only person who voted against that was Andy Haldane, whose last meeting it was as chief economist of the Bank.

Again, Haldane’s dissent was expected. He’s the closest thing to an inflation hawk (or a growth optimist might be a better description) that the Bank has (or had). And yet he couldn’t even attract a single sympathy vote on his last day in the office. Tough crowd.

The Bank also echoed the central banking script of the day. Inflationary pressures are “transient”, the Bank is focused on the “medium-term”, even though it acknowledged that inflation “is likely to exceed 3% for a temporary period”.

The Bank is meant to keep inflation within a percentage point of its central 2% target. That means that the governor Andrew Bailey will probably need to write a few letters to chancellor Rishi Sunak explaining that the dog has eaten his homework, but not to worry about it.

In short, the Bank is having its cake and eating it. It’s not worried about the economy which seems to be growing well. But it’s not worried about inflation either. So it can sit on its hands for now.

Savers – you won’t be getting any rate relief for a long time to come

One point of interest is that – like the Fed – the Bank is focusing on how employment recovers. That implies that its attention will be on what happens in September once the Treasury’s support for furloughed workers comes to an end (assuming it does).

At that point, the concern is that there might be a spike in unemployment. That said, the Bank did note that the number of employees on furlough is decreasing more rapidly than it had expected. And you’d hope that if the recovery continues apace, fears of a September spike will be overstated.

What does this all mean? Well, if you’re a saver in a bank account, you’re stuffed. But you know that already, don’t you? You haven’t been getting a “real” (after inflation) rate of interest on your cash savings for a very long time.

And as Merryn points out here, that’s likely to continue, or even deteriorate. That doesn’t mean you should stick all your money in markets. Cash gives you “optionality”, which is a very useful thing in any kind of environment, but particularly in one as disputed and changeable as this one is. So you should certainly hold some cash, and just grit your teeth about the measly interest rates on offer.

However, if you are looking for places to invest, then I still think there’s plenty of room for UK assets to play catch up with more expensive markets elsewhere. An ongoing relaxed attitude towards inflation might help to prevent the pound from rising in a dramatic manner, but that’s not such a bad thing given the quantity of dollar earnings that FTSE 100 companies generate.

We discussed other reasons to like UK markets in the latest issue of MoneyWeek magazine and we also have some excellent Aim stock ideas in there this week – subscribe now if you haven’t already.

And don’t miss the podcast. You can listen to it here.

By the way, I’d also highly recommend that if you don’t already subscribe to the podcast (it’s free – just access it via your podcast app of choice) then do so now. Merryn has lined up a series of interviewees that you simply can’t miss – more on that to come.

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.