The Bank of England seeks to prove that it is in a “price-stabilizing business”

The Bank of England seeks to prove that it is in a “price-stabilizing business”



Bank of England Governor Andrew Bailey insisted on Thursday that the central bank no choice But to raise interest rates, saying that if the central bank does nothing, it may cause inflation to remain high.

Given that consumer price inflation is currently at a ten-year high of 5.1%, and the central bank’s target is 2%, this is the Bank of England’s new slogan “in a price-stabilizing business” into action.

But the first interest rate hike in more than three years raised two questions: Why tighten monetary policy now instead of early next year, because the economic uncertainty released by the new Omicron coronavirus variant may have eased? A slight increase in interest rates by 0.15 percentage points to 0.25% will have any impact on economic recovery and people’s lives?

The Bank of England Monetary Policy Committee met the expectations of financial markets and economists for two consecutive meetings. By maintaining interest rates in November and raising them on Thursday, Bailey will realize that he is seen as an unpredictable communicator of monetary policy. .

Alan Monks, an economist at JPMorgan Chase, summed up the MPC rate hike as “the right decision, the wrong month” and said that it would make more sense to take action in November, when inflation had soared and Omicron was not concerned.

The Bank of England refuses to accept such criticism. Instead, its reasoning can be summarized as a reaction to the three “Ds” that have occurred in the past six weeks.

First, the new data shows that the threat of inflation has intensified. Second, the new review of the nine members of the Monetary Policy Committee shows that they are concerned about the prospect of continued price increases. Third, the new discussions with the company highlight the need to act quickly.

The data highlighted by the Bank of England came mainly from the labor market. Members of the Monetary Policy Committee pointed out that the end of the government’s vacation program in September “almost no sign” has weakened demand for workers and strengthened their view that “the labor market is tight and continues to tighten.” “.

Companies find it difficult to recruit new employees. Companies currently find recruitment is much more difficult than normal (October to November 2021, %) G2032_21X

The Monetary Policy Committee’s continued underestimation of inflation this year has also attracted people’s attention. Members now expect the annual growth rate of prices to reach a peak of around 6%. Their prediction Four months ago.

This led to changes in the MPC’s deliberations. The members did not try to interpret high price growth as “temporary” or “temporary”, but accepted that inflation above the target might continue.

Although members still expect the inflation rate to fall in the second half of 2022, they are now worried that companies and workers will respond to rising costs by raising prices and increasing wage demand.

Monetary Policy Committee Looking forward now Commodity price inflation will remain “far above” pre-pandemic levels in the coming months. It expects service inflation to “further increase” and food prices to “further rise, reflecting increased costs in recent months.”

One thing that shocked MPC members the most was its regular discussions with companies across the UK, including through surveys of decision makers in the corporate world.

All of these indicate that inflation may continue. The company reports that they have increased prices by nearly 5% in the past year, and plans to increase it by 4.2% by November 2022.

The company has been raising prices and expects to continue to do so in 2022. Realized and expected price inflation (%) G2032_21X

The Bank of England’s survey of policymakers also showed that nearly 60% of companies found that “recruiting” employees was “much more difficult than normal.” The most stressed areas are the well-known labor shortages: hotels, transportation, and logistics.

If these three Ds explain the Monetary Policy Committee’s new concerns about continued inflation and its members voted to raise interest rates by 8 to 1, then the increase of 0.15 percentage points is insignificant compared to the problems identified by the Bank of England.

Higher interest rates usually work by seeking to curb company and household spending, in part by increasing borrowing costs, thereby reducing demand and keeping it in line with the output that the economy can provide, without causing excessive price increases.

Given that the vast majority of mortgage borrowers now have fixed-rate loans, the 0.25% interest rate will not directly change much. Charles Roe, the head of mortgages at UK Finance, a trading agency, said: “More than 74% of mortgage customers use fixed-rate products, and their mortgage payments will not change immediately.”

Therefore, raising interest rates is more to warn companies and workers so that they will not add higher inflation to their pricing and wage decisions in the coming months.

In order to prevent people from thinking that the Bank of England will allow high inflation to persist, the Monetary Policy Committee stated that there are “good reasons” to tighten monetary policy immediately and further “appropriately” raise interest rates in the future, “to maintain price stability”. Mid-term”.

“When CPI inflation is significantly higher than the 2% target, maintaining the current monetary policy stance… may lead to a further increase in medium-term inflation expectations,” it added.

Nomura economist George Buckley correctly predicted that the Bank of England will take action on Thursday, saying that interest rate signals are more important than interest rate increases.

He added: “The bank obviously does not want to be in a situation where inflation has risen further and the virus has subsided again within two to three months, but it has failed to bring the policy interest rate to the ground.”


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