Investors were taken by surprise when the BoE held off raising interest rates this month, but are now betting that policymakers will move in December, with a small initial increase — the first since 2018 — taking borrowing costs from a historic low of 0.1 per cent up to 0.25 per cent.
Andrew Bailey’s comments over the weekend suggest a rise in interest rates at December’s meeting of the Monetary Policy Committee is not yet a done deal, despite data last week that showed employment had continued to rise after the end of the UK’s coronavirus furlough scheme, while inflation hit its highest level in a decade.
In an interview with the Sunday Times newspaper, Bailey said the key issue for the BoE would be whether a tight labour market led to higher wage demands that could keep inflation persistently above target.
Huw Pill, the BoE’s chief economist, said on Friday that the “burden of proof” had now shifted so that policymakers would have more explaining to do if they left interest rates unchanged than if they raised them. “I’m looking perhaps for reasons not to hike rates,” he told a conference in Bristol — adding that while it might be “convenient” to raise rates to a multiple of 0.25 per cent, the MPC could still choose a different scale of tightening if they thought it more appropriate.
He continued: “And C, however the concern for us is what they classically call ‘second-round effects’, particularly in wage bargaining and the labour market . . . If the economy evolves in the way the forecasts and reports suggest, we’ll have to raise rates.”
“A, activity in the economy is slowing. B, the proximate cause of many of these inflation issues is on the supply side, and monetary policy isn’t going to solve these directly . . . It doesn’t get more gas, more computer chips, more lorry drivers”, he said, in reference to surging energy prices and supply chain shortages.
But Bailey also warned said that even if the BoE had persistently underestimated the strength of inflation over the past year, the risks to its forecasts were now “two-sided”, adding: “You’re in a fairly febrile world . . . There are risks both ways. Obviously, our concern would be that if it gets into second-round effects, it [inflation] could be elevated for longer.”
The BoE’s latest forecasts show economic growth slowing in the final quarter of the year, owing to supply chain disruption and higher inflation curbing consumer spending.
But data published in the past week pointed to resilience in retail sales and an improvement in consumer confidence — along with a broad-based rise in inflation and further evidence that the end of wage subsidies has not led to a sudden wave of job losses. Andrew Goodwin, at the consultancy Oxford Economics, said last week’s labour market data had been “unambiguously strong” and that “a repeat of this strength in next month’s release, which will be published two days before the MPC’s decision, could easily be enough to generate a majority for a pre-Christmas hike”.