Economic Perspectives –
The MPC in September: inflation seen higher and growth weaker than in August
The latest Perspective from Ruth Lea CBE, Economic Adviser to Arbuthnot Banking Group.
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the MPC’s September meeting:
- Monetary policy was unchanged at the MPC’s September meeting. There was a unanimous vote to keep the Bank Rate at 0.1%, whilst two MPC members (out of nine) voted to reduce the existing programme of bond purchases (QE).
- CPI inflation was expected to rise further in the near term, to slightly above 4% in 2021Q4, higher than in August.
- The Bank revised down GDP growth for 2021Q3, from 2.9% to 2.1%.
- The MPC minutes said the case for some modest tightening over the forecast period seemed to have strengthened since August.
Other UK economic news:
- The ONS reported that public sector net borrowing (PSNB) was a greater-than-expected £20.5bn in August, the second highest August borrowing since monthly records began in 1993.
- Debt interest payments were £6.3bn in August, compared with £3.4bn in August 2020, reflecting higher RPI inflation to which index-linked gilts are pegged.
- The PSNB for April-August 2021 totalled £93.8bn, compared with the projection of £125.6bn based on the OBR’s March 2021 forecast. The OBR’s forecast of £233.9bn of borrowing for full-year FY2021 could be undershot by a considerable margin.
- The public sector net debt (PSND, excluding public sector banks) was £2,202.9bn (97.6% of GDP) at end-August 2021.
- The public sector debt interest to revenue ratio (DIR) in the rolling 12-months to August 2021 was 4.0%, compared with 2.9% a year earlier, and below the 6.0% level set by the government as a target.
- The Markit/CIPS flash UK Composite Output Index eased slightly to 54.1 in September, after August’s 54.8. Both manufacturing and services saw rates of expansion ease in September, with the slowdown more pronounced in manufacturing.
- At their September meeting, the US Fed’s FOMC flagged up possible interest rate rises in 2022, whilst tapering has clearly moved up the agenda, possibly starting in November.
- In their latest Economic Outlook, the OECD estimated that higher commodity prices and shipping costs were adding around 1.5 percentage points to annual consumer price inflation across the G20 countries.
- Markit’s flash indices suggested that growth in both the Eurozone and the US eased in September.
Ruth Lea said “Whilst there was no formal forecast update accompanying the MPC’s September meeting, it was clear that the Bank’s overall economic assessment had deteriorated since August. Inflation, which had ‘continued to surprise on the upside’, is now expected to be slightly above 4% in 2021Q4, higher than in August, whilst GDP growth has disappointed, partly reflecting the emergence of some supply constraints on output. Granted some of the recent increase in inflation can be attributed to base effects, but it would seem prudent at this stage for the MPC to cut back the current bond purchasing programme (QE).”
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