The risk of a gradual change in the bank rate increases


“If we don’t bring inflation back to target, things get worse, so we need to bring inflation back to target and we will,” – BoE Governor Andrew Bailey.

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The latest remarks and comments suggest that the Bank of England’s (BoE) Monetary Policy Committee is just a single digit inflation or jobs report away from a dramatic change in the pace at which the discount rate is raised, and that such a radical change could occur as soon as the political decision in August.

Governor Andrew Bailey and Chief Economist Huw Pill are two members of the nine-seat Monetary Policy Committee who have so far favored lifting the Bank Rate only in standard 0.25% increments, but remarks they made last week suggest that their positions could be changing.

This is important because any trend for larger moves from these two countries would likely tip the MPC balance in favor of this, although it could also be doubly important following inflation data coming out of the US and of the interest rate decision from the Bank of Canada on Wednesday.

The BoE was one of the first major economic central banks to act when it began raising the Bank Rate in December 2021 and has since raised the benchmark to 1.25%, its highest level since 2008, although all of its five separate rate increases involved increases of 0.25% or less.

“We believe and this has been the case in a number of our recent meeting assessments, we believe that inflation should decline rapidly next year as these shocks fade. However, in the Policy Report monetary policy in May, we said the risks were on the upside,” Governor Bailey told David Marsh, chairman of the Official Monetary and Financial Institutions Forum (OMFIF).

“We deliberately use the word forcefully in the last statement because, clearly, if we see evidence of this persistence, we will act forcefully. No questions about this. We wanted people to understand that, therefore, there are more options on the table than just 25 basis points and that those options can go either way,” the governor also said in crafting his answer Tuesday this week.

The above remarks were made during a conference on the post-pandemic UK economic landscape and its interaction with the global interest rate environment, which may influence the trend level of real interest rates in the UK United and in other open economies.

Governor Bailey reiterated and strongly endorsed the position taken by the BoE last month when he told an audience this week that while domestic prices and wage levels were to rise further in response to a series of inflation shocks imported, then the BoE should act. with more force.

“If we don’t get inflation back to target, things get worse, so we need to get inflation back to target and we will,” he also said.

His other remarks indicated that wage growth excluding one-off bonuses (more of that data released in July) will be a big influence on the BoE’s thinking in August and similarly with the core inflation measure for June, which ignores imported energy and food prices.

Source: Bank of England.

“It’s important because it obviously distinguishes what I would call the immediate effects of the Russia-Ukraine situation, in particular the effect on energy prices,” he said when discussing tuesday.

Inflation in the UK rose slightly from 9% to 9.1% in May and the Bank of England expects it to exceed 11% before the end of the year, while the inflation rate is below underlying actually declined from 6.2% to 5.9%.

But exactly that kind of outcome was recently seen in the United States only for Bureau of Labor Statistics figures to later reveal on Wednesday that the core inflation rate jumped to a new high of 9.1% in June and that the core inflation rate has accelerated. especially in terms of month on month.

This is particularly notable after Governor Bailey and Huw Pill’s remarks at the University of Sheffield Chief Executive’s Club and the Qatar Center for Global Banking and Finance conference last week.

“A recent communication underlined the Committee’s willingness to act forcefully, if necessary, in the face of signs of more persistent inflationary pressures. At least on my part, this statement reflects a willingness – should circumstances warrant – to adopt a faster pace of tightening than we have seen implemented in this interest rate cycle,” he said. said Pill in part at the University of Sheffield.

Source: Bank of England.

“And that signals that attention will shift to indications of more persistent inflationary pressures, which I think highlights potential second-round effects in price and wage-setting behavior. Much remains to be resolved before we vote on our August policy decision. How I vote on that occasion will be determined by the evolution of the data and my interpretation,” he added.

Chief Economist Huw Pill argued before the Managing Director’s Club that continued attempts by businesses and workers to avoid falling incomes linked to price pressures for imported commodities and tradable goods risk creating a self-sustaining inflation dynamics in the United Kingdom which would force the BoE to act more forcefully on its interest rate. This is his main concern.

“UK price makers and wage negotiators will try to offset the impact of higher headline inflation on their real purchasing power by seeking higher profit margins or higher wages to preserve their real income. Crucially, it threatens to create more persistent inflation dynamics in the UK, which continues even after the initial impulse from external sources has dissipated or even reversed,” he previously told the Qatar Center.

“It is through these second-round effects that higher current inflation can become part of the inflation process and achieve an autonomous dynamic of its own. Such behavior would threaten a more sustained deviation of inflation from target, going beyond the realization of short-term volatility that I have already mentioned,” he also said in the same letter. speech.

Source: Bank of England.


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