David Milliken and Andy Bruce
LONDON (Reuters) – Bank of England policy makers on Thursday will see how far interest rates need to go. Divided to curb inflation, Governor Andrew Bailey highlighted uncertainty over the outlook for economic growth a week after the Bank of England signaled its number of rate hikes could peak.
Monetary Policy Committee members weighed in on inflation reaching 25 year high 10. October fell to 10 Dec. 5% – Still more than five times the BoE’s 2% target. Most of his colleagues dropped the word last week.
On the other end of the debate, Silvana Tenreyro, who voted against a half-basis-point rate hike last week and in December, said rates were already too high and t she might Will consider voting for a rate cut at a future meeting.
Like other central banks, the BoE is trying to reduce the risk of a surge in inflation and has raised interest rates
for the first time in a row last week 3 times raised the bank interest rate from 3.5% to 4%, the highest point since 2008.
But it is also concerned about exacerbating a mild recession expected to last a long time this year, a scenario most other countries will avoid.
Last week, Bailey said inflation was turning to inflation, even if it was too early to declare victory.
Financial markets and economists now see the Bank of England raising interest rates by just 0.25 percentage points – either next month or in May.
Ahead of the BoE’s latest meeting, markets were pricing in a more likely rate peak at 4.5% in 25 mid-year.
Bailey said again on Thursday that the inflation trend appears to have reversed, but reiterated the risk to the Bank of England’s main forecast, which is below target in the medium term 2024.
“I’m very unsure about how prices are set and wages are set in this country. We have the largest upward bias ever in our forecasts for inflation,” Bailey said. Uncertainty over how quickly long-term inflationary pressures will recede following last year’s energy price shock.
Haskell aligns with Katherine Mann, who also sees significant upside risk to the BoE price forecast.
“Economic theory suggests that persistent uncertainty surrounding inflation warrants stronger action,” Haskell said in his annual report to parliament.
“(So) I will continue to be vigilant for signs that inflation is more persistent than we expect and act forcefully if necessary.”
By contrast, Tenreyro It said that the full strength of the Bank of England to raise interest rates last year has not yet appeared, and the economic momentum has weakened.
“Right now the interest rates are too high,” she said. “I think I would consider a rate cut.”
Huw Pill, chief economist at the Bank of England, said there were some signs of weakness in the labor market, but the central bank’s job of tightening policy was not over.
“It’s critical to see through it and we do enough to address the underlying upside risk to inflation,” he said.
Firms could have more pricing power than expected, or workers could be more successful in negotiating for higher wages — both factors could slow inflation back to target, he said level.