Andrew Bailey, the governor of the Bank of England, has suggested that interest rates might have reached their highest point, following 10 consecutive hikes in the official borrowing cost since December 2021.
Bailey mentioned in London that the Bank would evaluate the effects of the stricter policy on the economy before authorizing any additional actions. Nonetheless, he also cautioned that the Bank was conscious of the possibility of repeating the blunders of the 1970s and would not hesitate to raise rates above their current level of 4% if inflationary forces became firmly entrenched.
At the last meeting of the Bank’s nine-member Monetary Policy Committee in February, Bailey voted in favor of a quarter-point increase in interest rates. However, he now seems to have adopted a wait-and-see approach, cautioning against suggesting that they are done with raising the Bank rate, or that they will definitely need to do more. Bailey explained that further rate increases may be necessary, but nothing has been decided, and policy decisions will be informed by incoming data about the economy and inflation outlook.
Analysts noted that Bailey’s speech pushed back against the idea of further interest rate increases later this year, which financial markets had been anticipating. Samuel Tombs from Pantheon Macro stated that the Committee is placing more emphasis on the substantial tightening that has already been delivered and would like to end its hiking cycle as soon as feasible. Krishna Guha from Evercore observed that Bailey has become the first central bank chief to resist the hawkish global repricing of rates in recent weeks.
Bailey mentioned that the Bank’s outreach programs with the public had brought home to him the impact of high inflation on people’s lives. Although inflation has fallen slightly from its peak late last year, the government’s preferred measure still shows inflation running at 10.1%. Bailey said that people should not have to worry about inflation in this way.
Bailey also acknowledged that the UK has been hit by several significant economic shocks, including Brexit, Covid, and the rise in global energy prices linked to Russia’s invasion of Ukraine, with no easy way out. He added that people on lower incomes are struggling to make ends meet, and the Bank must ensure that the situation does not worsen by allowing “homemade inflation” to take hold.
According to Bailey, monetary policy cannot alleviate the shock to national real income, but it can ensure that inflation caused by external factors does not turn into lasting inflation caused by domestic factors. He stated that homemade inflation would not benefit the country and would cause those with weak bargaining power to fall further behind.
Bailey warned that failing to raise interest rates now could lead to tougher action in the future, as the experience of the 1970s taught us. However, he added that the Bank needs to be cautious and monitor how the previous tightening measures are affecting consumer prices.
Bailey also noted that the tight labour market across much of the UK economy would be a critical factor in future rate-setting decisions. He stated that the labour force in the UK has shrunk, with a large increase in the number of people who do not participate in the labour market since the start of the Covid pandemic
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