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“It is appropriate” that the markets assess “a much earlier tightening path than before”.
By Wolf Richter for WOLF STREET.
Inflation in the UK fell from less than 1% earlier this year to 3.2% in August, the highest in 10 years, with core inflation – excluding food and energy – reaching 3.1% . OK, there was a “base effect” due to the very low inflation rate a year ago. But the current inflation spike, as measured by the average annualized last six-month inflation, is already at 4.5%, unrelated to the base effect. An annual inflation rate of 4.5% would be the highest in decades. In September, the Bank of England raised its annual inflation forecast by the end of the year to over 4%.
While this figure remains below the scorching inflation in the United States, it is well above the Bank of England’s 2.0% target.
And the BoE is concerned that the underlying trends are persistent, rather than temporary, that they are taking hold in the economy, and that they will be difficult to dislodge by monetary policy once they are. entrenched, and that’s pushing noise rates up much sooner than expected.
“Unfortunately, if you look at our latest forecast, there [inflation] is going to go higher, I’m afraid, ”Andrew Bailey, BoE Governor and Chairman of the BoE’s Monetary Policy Committee, told the Yorkshire Post in an interview. “As Governor of the Bank of England, I would prefer it not be there. But we are living in a very unusual time, and what I would say is that we have to manage our way through these times, ”he said.
“Obviously I’m concerned about inflation above target,” he said. “We’re going to have a very delicate and difficult job to do, so we have to, in a way, prevent it from taking root permanently, because that would obviously be very damaging.”
A huge amount of attention is currently being directed to bring inflation under control, he said.
As the pandemic changed consumer behavior, the economy had “a whole host of challenges that we will just have to face,” he said.
“We have some very big and unwanted price changes,” he said.
“This is an almost unprecedented series of events. They are not over yet, as we learn. We have to manage our way through them, and we will, ”he said.
Prices in the energy market have indicated that inflation will be higher next year, as a price cap on consumer energy tariffs set by the regulator is expected to rise again next year.
“A huge amount can happen by then so I’m not going to speculate,” Bailey said, “but for now, the forward curve would suggest it would be higher, which would suggest a persistence of the inflation.
“So the transience would be longer,” he said.
Financial markets are now anticipating the first rate hike later this year, after the BoE, at its last meeting, raised the possibility that it could hike rates as early as November.
Michael Saunders, a member of the BoE’s monetary policy committee, told the Telegraph: “I think it is appropriate that the markets have taken a much earlier tightening path than before.”
He fears that pressures on capacity and higher wage growth will cause inflation to rise which “could become more persistent unless monetary policy reacts,” he said.
Huw Pill, the new chief economist of the BoE, said last week that “the balance of risks is currently shifting towards major concerns about the outlook for inflation, as the current strength of inflation is expected to prove more lasting than initially planned “.
If the BoE raises its key rate this year, much earlier than expected just a few months ago, it would follow in the footsteps of smaller central banks in Europe and elsewhere that have already raised their rates, some of them already several times :
- Bank of Korea: 1 increase, 25 basis points
- Czech National Bank: 3 hikes, for a total of 125 basis points
- National Bank of Poland: 1 increase, by 40 basis points
- Central Bank of Iceland: 3 hikes, for a total of 75 basis points
- Norges Bank (Norway): 1 increase, 25 basis points
- Reserve Bank of New Zealand: 25 basis points.
Everything happened much faster than expected this spring. And there are growing concerns – as by BoE governors, but also among Fed governors and many others – that the notion of this inflation surge being “transient” or “temporary”. Can not be realized in reality.
Some are concerned that the underlying trends are an indication that this is going to be much more persistent and is integrating into the economy, amid altered consumer behavior documented by their willingness and ability to pay. anything amid huge tax spending and monetary stimulus. And the tightening – or rather the removal of monetary stimulus, as central bankers will point out – is coming faster than expected. One of the biggest money printers, the Bank of Japan, has already stopped printing money
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