IInflation is becoming increasingly difficult to ignore.
From central bankers to ordinary consumers worried about their energy bills, the speed at which prices are rising has become a matter of serious concern. Investors are also worried.
Financial markets are betting that the major Bank of England interest rate could rise to 1 percent by the end of 2022, the highest rate in more than a decade, starting this December with a modest 0.15 percent increase. But this goes against an uncertain global economic outlook, and the recovery of the UK, which seems to be losing steam, limited by material and labor shortages.
This puts the Bank of England in trouble. Threadneedle Street interest rate settlers will face a problem they’ve been weighing for months on November 4: whether climbing inflation is a short-term pandemic pest caused by restarting the economy and scrapping global supply chains. occurs, or is a persistent problem. Which should be subsumed with interest rate hikes.
If the Committee of Rate Setters raises the key interest rate, it would mean the central bank would have to outdo its international peers, ahead of the US Federal Reserve and the European Central Bank.
The Bank of England has its own forecast that inflation will reach more than 4 percent by the end of this year, potentially outpacing the underlying increase in real average wages calculated by the Office for National Statistics. US data on Wednesday showed price growth in the world’s largest economy remained high.
Bank of England Governor Andrew Bailey has changed his stance on the issue. In July, he said it was “important not to over-react to temporarily strong growth and inflation”. Last week he said: “We have found some very large and unwanted price changes” that could prove “very harmful” if they become “embedded” in the economy, over a long period of time.
Interest rate hikes are painful for someone who may have a mortgage or loan, they can be good news for savers, and they move huge waves of money around in the financial markets.
But while investors’ bets indicate the hike will happen soon before the end of the year, some economists think it would be a misstep. It is difficult to ascertain exactly where the central bank is leaning.
Investors are obsessed with scrutinizing every word of central bankers, whether written or spoken. Many people now try to use artificial intelligence and work to build a path of linguistic habits that is, in fact, what a given phrase might imply. The Bank of England, like other central banks, knows this, and therefore tries to give calm, clear signals to the markets to avoid panic or disruption.
Still, this sensitive chain of communication became a bit messy around paragraph 65 in the latest Bank of England minutes, according to John Wraith, head of rates strategy at Swiss bank UBS.
It read: “All members of this group agreed that any initial tightening of monetary policy in the future should be implemented by raising the bank rate, even if the tightening ends at the end of the current UK government’s bond asset purchase programme. be appropriate before.”
The bond buying effort, also known as quantitative easing (QE), is scheduled to last until mid-December. Investors speculated that it was therefore a signal for a rate cut as early as November, based on paragraph 65. But Wraith doesn’t think it’s that easy.
“My interpretation is that they are not saying ‘signal signs, we think we can raise rates any minute now,’” Mr. Wraith says. Rather, it was a sign that if rate setters worried that inflation was getting out of hand, they would raise interest rates first. It doesn’t have a time limit, explains Wraith.
This is a view shared by Neil Shearing, group chief economist at Capital Economics. He doesn’t think the hike is a “done deal” this year, but it is likely that there will be a significant rate hike before May 2022.
Still, analysts at Goldman Sachs said on Friday that a hike in the November meeting was “more likely” than in the December one, and that in their view, rates will rise this year.
Several forces are now feeding inflation in the UK, many of which are external as well as domestic. Britain is an import dependent country, from its energy and food needs to its dependence on foreign investment to meet its current account deficit. And while global prices for many commodities have risen, the value of the pound has weakened. This has led to higher imported inflation.
But if the Bank of England tries to ease that price pressure too soon, it could have the opposite effect.
“I think raising rates now will be partly in the hope, or purpose, of strengthening sterling,” says Mr. Wraith. But it could be a bad sign to send investors when other evidence suggests the economic recovery is still fragile. “The danger is that the market says ‘Well, you moved here too quickly.’”
While expectations of higher interest rates typically increase the value of a currency, recent rate increases have had the opposite effect. Data from the Commodity Futures Trade Commission shows bets against the pound that currency traders expect the hike to have an upside, as suggested by Mr. Wraith. Rather than strengthen sterling, he sees higher interest rates further weakening it by slowing economic growth.
The economy also faces labor anomalies. Furloughs have ended and record high vacancies have been advertised, but some workers are dropping out of the labor market altogether, while others, laid off workers do not necessarily meet the skills employers need.
This mismatch effect means that the picture of the labor market may look positive, but economists’ words are not tight. This means that what seems to be a traditional source of inflation – higher employment that can push up wages as employers’ demand outstrips the supply of workers – could be just an effect in some sectors, rather than the economy.
A survival crisis is also looming, in which many benefits claimants have jobs but with too few hours, or are paid too little to meet their needs.
“The pandemic has been driven out of shape by the pandemic,” says Ian Mulhern, chief economist at the Tony Blair Institute. “At the moment you have to consider that the effect of inflation is temporary.”
But temporary doesn’t mean the price hike will subside quickly. “However, one thing that is more serious is that these pressures may continue for some time,” explains Mr. Mulhern. Inflation may remain well above the central bank’s target of 2 per cent next year.
Which is why, in his view, Governor Bailey is starting to talk hard on price pressures to try and manage expectations as inflation proves more sticky than previously expected.
“At the moment there is a premium on appearing alert. Perhaps the hope is that by looking alert you don’t have to act as fast as if you seem relaxed. I suspect they are trying to send a message, ‘ says Mr. Mulhern. But the pressure of “acting too soon” and bending to increase rates is “much less important” than the risk of inaction.
Some, who will decide on interest rates in a few weeks, believe the hike this year will be very serious for the economy. But there is no question that inflation has proved more stable than previously forecast, nor is there any doubt among economists that the UK has a long way to go in its post-pandemic recovery.
“As the governor himself said, there are ‘tough yards’ ahead. It seems undeniable to me,” says Mr. Wraith.
Credit: www.independent.co.uk /