Bank of England bosses are set to consider unwinding part of the post-Brexit vote emergency stimulus this week after some of its top economists shocked markets last Thursday by pushing for an interest rate hike, according to reports.
The Bank’s financial policy committee (FPC) will discuss the implications of ending the Term Funding Scheme (TFS) at its meeting on Wednesday, the Sunday Times said, citing anonymous sources.
The scheme was introduced as part of an emergency stimulus package announced in August last year after the UK voted to leave the EU. That stimulus included the TFS and an interest rate cut to current historically low levels of 0.25 per cent for bank rate, the main interest rate offered by the Bank of England.
The TFS aimed to improve the transmission of those low interest rates to the broader economy by offering banks cheap loans, in an attempt to stimulate the UK economy ahead of what the Bank predicted was an imminent slowdown.
However, the UK economy performed more strongly than expected in the aftermath of the Brexit vote, while inflation has since hit 2.9 per cent, far above the Bank’s two per cent target.
The Bank’s governor, Mark Carney, has repeatedly said the rate-setting monetary policy committee (MPC) will look through inflation related to import prices only, but last week three of eight MPC economists voted to tighten monetary policy, in a sign the tolerance of rising consumer prices may be reaching breaking point.
That shift in balance towards a more hawkish tilt surprised markets, reigniting speculation the Bank could act to tighten the supply of money to the economy in an effort to “normalise” monetary policy.
The TFS is currently set to run until February 2018, but an earlier withdrawal would be a plausible signal the Bank is willing to start back down the road to higher interest rates, according to Kallum Pickering, senior UK economist at Berenberg bank.
He said: “I can see the logic that removing the Term Funding Scheme is a precursor to a rate hike.”
If the Bank’s economists are trying to prepare markets for tightening monetary policy it is highly likely policymakers would discuss the implications for financial stability, the main function of the FPC.
Chris Bailey, a strategist at investment manager Raymond James, said: “My view is that it might happen, but if it did as a monetary tightening it would push back the need for a rate rise.”
“Stimulus and interest rates go hand in glove, so I would interpret it just like the US Federal Reserve a few days ago. More stimulus withdrawal means less near-term rate rises.”