Last month the Bank of England announced its tenth rate rise in a row, taking interest rates to 4 per cent. At the time it was speculated that the BoE might end there: not only were rates now catching up with market expectations of where they would peak, but there seemed to be more agreement within the Monetary Policy Committee, based on the way its members were voting, that it was time to slow down. Their own report noted that, to keep hiking rates, the Bank would need to see ‘persistent pressures’ contributing to inflation.
But the Bank’s governor reminds us once again that nothing is off the table. 'I would caution against suggesting either that we are done with increasing the Bank rate, or that we will inevitably need to do more,' Bailey told the audience at a Brunswick Group event. ‘Some further increase in Bank rate may turn out to be appropriate, but nothing is decided.’
Bailey’s call for ‘caution’ has the air of a lesson (slowly) learned. Having been so insistent in 2021 that inflation was ‘transitory’ and nothing to act on, prices started spiralling well before the Bank intervened with rate rises, making it much harder to play catch-up. His confident comments about inflation at the time – which proved to be disastrously wrong – are part of the reason the Bank has had to keep raising rates. It’s not just an inflation issue now, but a credibility issue for the Bank, too. Rate rises have been a necessary part of convincing market players that the UK is serious about steadying inflation, and that the Bank takes its target of 2 per cent inflation (it is still in double digits right now) seriously.
While the Bank was finally nearing market expectation for peaking interest rates, they have risen just in recent days: possibly due to anticipation around what the Windsor Framework would include. It has levelled out at 4.75 per cent, which could be achieved through smaller hikes, say 25 basis points – or perhaps won’t be realised at all. But it’s not just energy costs that the Bank has to keep a close eye on: it’s food costs (which aren’t budging), the cost of domestic services (still impacted by a tight labour market) and the overall rate of inflation, which remains far too high.
The Bank’s latest set of forecasts still predicts a dramatic fall in the rate this year. But in contrast to how he first handled inflation, there was acknowledgement from Bailey at the Brunswick Group, that the Bank still has an active role to play. 'If we do too little with interest rates now' he said, 'we will only have to do more later on. The experience of the 1970s taught us that important lesson.' Better realised late than never.
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