The Bank of England governor, Andrew Bailey, has stated that after 10 successive official costs of borrowing surges since December 2021, interest rates may have peaked.
In a speech delivered in London, Bailey conveyed that before sanctioning any new move, Threadneedle Street would be evaluating the impact on the economy due to tighter policy.
Reminding everyone of the 1970s situation, the governor cautioned that the Bank wouldn’t hesitate to hike rates even further from their current 4% level should inflationary pressures arise.
On Wednesday, Bailey stated that he would be adopting a wait-and-see strategy despite voting for a quarter-point increase in interest rates at the last meeting of the Bank’s nine-strong monetary policy committee held in February.
“At this stage, I would caution against suggesting either that we are done with increasing Bank rate, or that we will inevitably need to do more,” he said. “Some further increase in Bank rate may turn out to be appropriate but nothing is decided. The incoming data will add to the overall picture of the economy and the outlook for inflation, and that will inform our policy decisions.”
As per the financial experts, Bailey’s speech challenged the assumption that future interest rate increases are inevitable later this year.
From Pantheon Macro, Samuel Tombs stated: “It is clear from Mr. Bailey’s speech that committee is placing more emphasis on the substantial tightening already delivered and would like to call time on its hiking cycle as soon as it feasibly can. It makes little sense at present, therefore, to price-in a terminal rate at 4.5% or higher.”
From Evercore, Krishna Guha conveyed that Bailey had “become the first central bank chief to push back against the hawkish global repricing of rates in recent weeks that pushed the market discounted peak UK bank rate close to 5%”.
According to Bailey, rising inflation was having an impact on people’s lives, as evidenced by the Bank’s public engagement programs. The government prefers to measure the cost of living index at 10.1%, even though it had decreased from 11.1% late last year.
The governor stated, “People should not have to worry about inflation in this way.”
Further continuing, Bailey conveyed that the UK had been subjected to a series of “significant economic shocks”—including Brexit, COVID, and the surge in energy prices worldwide associated with Russia’s invasion of Ukraine—and there was “no easy way out.”
The Bank needs to ensure that the situation does not get out of hand, allowing “homemade inflation” to grip people with lower incomes who are already struggling to survive.
“I am afraid monetary policy cannot make the shock to our national real income go away. But what monetary policy can – and must – do is to make sure that the inflation that has come to us from abroad does not become lasting inflation generated at home. Homemade inflation will not make us any better off as a country. Those with weak bargaining power will fall further behind.”
Bailey stated that tougher actions would be needed later if they failed to increase interest rates now. “The experience of the 1970s taught us that important lesson. But equally … we have to monitor carefully how the tightening we have already done is working its way through the economy to the prices faced by consumers.
“Our outreach events make clear that we need to calibrate monetary policy with great care to return inflation to target sustainably.”
Many sectors lack sufficient workers in a large portion of the UK economy, according to Bailey, and would play a vital role in the future as rate-setters take decisions.
“The UK labour market remains very tight. Since the start of the COVID pandemic, we have seen a large increase in the number of people who do not take part in the labour market in this country. The UK labour force has shrunk.”
- Published By Team Timeswire