November 5, 2021–In a move that surprised many observers in the financial sphere, the Bank of England voted 7-2 yesterday to maintain its federal Bank Rate at 0.1 percent and it voted 6-3 to continue purchasing U.K.-government bonds.
That came as a surprise move to many financial observers, including Merryn Somerset Webb is editor-in-chief of MoneyWeek, who had expected a moderate rise in the interest rate to 0.25 percent. Writing an opinion piece for the Financial Times, Webb said the concern is about reputation and expectation.
“The Bank has told us for ages that the inflation we feel all around us is transitory,” she wrote. “But it is also now telling us that it is “materially higher” than expected.”
Webb wisely pointed out that low-interest rates drive investors into savings vehicles such as dividend-paying equities.
One only needs to look at the price-to-earnings ratio for the largest indexes to see that investors are pouring into stocks in a chase for yield. The S&P 500, for example, is priced 38.8 times its total earnings. That makes the index, and therefore the stocks within it, “strongly overvalued” according to Current Market Valuation. And that poses a systemic risk not only to investors but also to the global economy as a whole.
Inflation Likely To Rise, BoE Says
Meanwhile, in the United Kingdom, central bankers said they expect inflation to rise to 5 percent by April 2022 — a figure well above the 2 percent target. The U.K. CPI Inflation currently hovers just over 3 percent.
The central bank says bottlenecks in the global supply chain are pushing prices up around the world.
Following The ECB and U.S. Fed
So, with inflation higher than the target and expected to rise, why the slow-to-no reaction by those people tasked with keeping it in check?
It’s unclear what’s going on. But the Bank’s decision to keep interest rates near zero is in alignment with recent calls by both the European Central Bank and the U.S. Federal Reserve. The ECB decided, in fact, to maintain negative interest rates despite inflation. Moreover, the Fed kept its rate near zero while Fed Chair Jerome Powell told reporters that, “it’s complicated.”
Other Economic News
In its November monetary report, the Bank of England also made the following points:
- The unemployment rate fell to 4.5 percent.
- Economic growth in the United Kingdom rose, although at a slower pace than projected due to “supply bottlenecks in certain sectors.”
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