BoE’s Pill backs rate hike to 4% to limit inflation catch-up effects
Bank of England (BoE) Chief Economist Huw Pill reiterated his support for raising the Bank Rate to 4.00%, arguing that policymakers cannot wait for uncertainty surrounding the Middle East conflict and energy prices to resolve before acting. Pill warned that delaying action could leave monetary policy behind the curve and allow higher energy costs to spread into wages and domestic prices.
Key takeaways
“My own response has pointed to a need to raise Bank Rate to 4%.”
“Raising Bank Rate on this basis need not be the start of a prolonged and aggressive series of increases.”
“A prompt increase in Bank Rate may serve to head off some of the potential insidious ‘catch-up’ dynamics.”
“Clear, prompt and decisive policy action and communication would help steer markets and reduce uncertainty.”
“We cannot wait for uncertainties to resolve themselves.”
“A wait-and-see approach risks creating a status quo bias in the setting of interest rates.”
“Fine-tuning interest rates in the face of uncertainty about energy prices is problematic.”
“I am unconvinced that labour-market slack means there will be no second-round effects.”
“There are reasons to believe that second-round effects will be stronger now than during the ‘halcyon days’ of inflation targeting.”
“The Iran war has not de-anchored longer-term inflation expectations.”
“The MPC should be cautious about using relatively extreme ‘what-if’ scenarios to explain its analytical framework.”
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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