The Bank of England believes that the tight labor market is an incentive for rising interest rates
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The Bank of England did not expect to change its Coronavirus monetary policy guidance So fast.
In the past year, it has even stated that it will not consider tightening monetary policy “unless there is clear evidence that significant progress has been made in eliminating idle production capacity and sustainably achieving the 2% inflation target.”
As the inflation rate has surpassed this target, it reached 2.5% in June, while The Bank of England now believes it will rise to 4% Later this year, and with signs of labor shortages across the economy, the committee decided to abandon the guidance.
The Monetary Policy Committee is not yet ready to raise interest rates from a historical low of 0.1%, but the Committee agreed to new guidelines, that is, if economic data meets its latest forecast, “moderate tightening of monetary policy during the forecast period may be necessary compared to the medium term. To achieve consistent inflation goals within the country.”
This change and the new guidelines raise many reasonable questions about the meaning of MPC in practice, but when Andrew Bailey, Governor of the Bank of England, discussed the committee’s new position at a press conference on Thursday, he did not The mood is open and transparent.
He declined to answer simple questions about the committee’s balance of opinions and the definition of “moderate,” but he explained more candidly the incentives for rising interest rates in a press conference.
The first two “key judgments” that the Monetary Policy Committee will consider before changing policy are that it believes that most of the increase in inflation next year will be automatically reversed and will continue to recover as the pandemic subsides. In these respects, Bailey believes that the committee’s views are correct. He emphasized that this is the third judgment on the labor market, and it is most likely to trigger higher interest rates earlier than expected in the next few months.
Employment prospects have changed much faster than expected. Although unemployment and inactivity are much higher than pre-pandemic levels, many employers are still struggling to recruit.
Bailey said at a press conference: “The challenge of avoiding a sharp rise in the unemployment rate has been replaced by the challenge of ensuring the flow of labor into jobs,” adding that the committee will pay close attention to the development of the labor market, especially the unemployment rate, and more broadly. Easing measures in the economy, as well as potential wage pressures.
The Bank of England now believes that the unemployment rate of 4.8% at the end of May has peaked, and will steadily drop to 4.4% within a year, starting from 2023 to 4.2%.
Basic salary increase The bank estimates that it has returned to levels close to pre-pandemic. Given that there are still a large number of workers on the sidelines, this is much stronger than expected: 250,000 more people are unemployed than before the pandemic, 750,000 are considered inactive, and 2 million people still have at least partial vacations in late June.
But to make matters worse from an inflation perspective, the Bank of England has found evidence of “friction” in the labor market, especially the recruitment difficulties reported by employers.
Currently, MPC believes that these issues are temporary and “may dissipate with the hiring tightening”, largely due to the speed at which the entire industry reopens. Another factor behind the shortage-the apparent reluctance of existing employees to find new jobs-is more likely to inhibit wage growth than to promote wage growth anyway.
But the MPC warns that if the labor shortage is more severe and lasting than expected-if workers are in the wrong place, or have the wrong skills, they cannot get available jobs, or if young people who leave the labor market to study continue to receive education. Years-this may lead to higher wages, more sustained inflation and the Bank of England to raise interest rates.
When it was time to tighten monetary policy, the Bank of England also changed its guidelines on how to raise borrowing costs for households, businesses and governments on Thursday.
Until Thursday, the Bank of England announced its policy that it will not change the level of currencies created and purchased assets under its quantitative easing program until interest rates reach 1.5%.
In the future, once the interest rate reaches 0.5%, the proceeds from the redeemed government bonds will no longer be reinvested.
Bailey said that this new quantitative tightening policy should not replace higher interest rates, but will provide a “predictable and gradual” path for reversing quantitative easing. He added that about 70 billion pounds of the 875 billion pounds of government bonds held by the Bank of England will mature in 2022 and 2023, and another 130 billion pounds will mature in 2023 and 2024.
Once the interest rate rises to 1%, the Monetary Policy Committee said it will consider actively selling the assets it owns, but the premise is that economic conditions and the sale “will not disrupt the operation of the financial market.”
In both policy areas, the Bank of England insists that it will not make any commitments and will only change its policy when it needs to control inflation. This means that the wait-and-see strategy that has been its slogan since the early days of the coronavirus crisis will continue.
But as Ruth Gregory, senior British economist at Capital Economics, said: “When it comes to the mechanism of austerity policy, this is another signal that austerity is getting closer.”