Digital Zeitgeist – The Head Of The Bank Of England Indicates That Interest Rates May Have Reached Their Apex
Nonetheless, Governor Andrew Bailey has stated that interest rates may increase once again if inflationary pressures become ingrained.
After 10 consecutive hikes in the official cost of borrowing money beginning in December 2021, the governor of the Bank of England, Andrew Bailey, has indicated that interest rates may have reached their maximum level.
While he was in London, Bailey stated that Threadneedle Street would evaluate the effect that tighter policy would have on the economy before authorising any further steps.
But, the governor also cautioned that the Bank was vigilant to the risk of repeating the mistakes of the 1970s and that the Bank would not hesitate to hike interest rates even more from their present level of 4% should inflationary pressures become ingrained.
During the Bank of England’s most recent meeting of its nine-member monetary policy committee (MPC) in February, Bailey cast his vote in favour of a quarter-point hike in interest rates. However, on Wednesday, he made it clear that he was now taking a wait-and-see attitude to the matter.
“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.”
The financial markets had been preparing for more hikes in interest rates later on in this year, but experts stated that Bailey’s statement provided opposition to this notion.
Samuel Tombs from Pantheon Macro said: “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.”
Krishna Guha from Evercore said 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%”.
Bailey stated that the Bank of England’s outreach programmes with the general population had made him more aware of the effects that rising inflation was having on people’s daily lives. Inflation is currently running at 10.1% according to the government’s chosen gauge of the cost of living, despite the fact that it reached a peak of 11.1% before the end of the previous year and has since dropped back significantly.
“People should not have to worry about inflation in this way,” the governor said.
Bailey added that the UK had been hit by a series of “significant economic shocks” – including Brexit, Covid and the rise in global energy prices linked to Russia’s invasion of Ukraine – and there was “no easy way out”.
People on lower incomes were struggling to make ends meet and the Bank needed to ensure that the situation did not get worse through allowing “homemade inflation” to take hold.
“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 said failing to raise interest rates now may necessitate tougher action later. “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.”
According to Bailey, the lack of available labour across a large portion of the UK economy will be a primary consideration for the rate-setters who make judgements in the future.
“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.”
online sources: theguardian.com, bankofengland.co.uk