BoE Governor Andrew Bailey Walks Back Interest Rates Hike Signals

In an interview with the Sunday Times yesterday, governor of the Bank of England Andrew Bailey attempted to walk back on confusing signals to the market that it would raise interest rates soon to fight inflation.

Although the bank’s core mandate is to control inflation, the market may have taken from its inaction at November’s monetary policy committee meeting that it was more concerned about employment. In comments to the Sunday Times Bailey said. “I was concerned that we were getting to a point where there was too much speculation that, actually, central banks are doing something different — they just aren’t saying they’re doing something different.”

That statement in itself may be unlikely to bring any clarity to matters.

Bailey observed the lack of movement in the bond markets in reaction to previous statements from the bank regarding the build up of inflationary pressures. Bond yields should typically rise when inflation is moving higher as investors demand higher returns to make up for the fixed income returns eaten up by inflation.

 “I’ve got to say that many of us were puzzled. Look at 10-year government bond yields over the summer — there was not much reaction going on. So as we saw the inflationary pressures growing, from the point of view of guidance on the framework of policy, I felt that I had to,” said Bailey.

Bank “must act” was conditional statement says Bailey

Referring back to his previous remarks that the bank “must act” on inflation, Bailey insisted that those were conditional. “But it was a conditional statement. Let’s be clear — if we see, particularly in terms of medium-term inflation expectations, that’s increasing, we’ll have to act. There’s no question. But to be clear, at no point did I, or anybody, say, ‘And by the way, we’re going to raise interest rates in November.’ ”

Bailey emphasised that on the one hand the bank had to contend with signs of a weakening economic recovery and on the other hand with elevated inflation, the roots of which he continued to locate primarily on the supply side.

Bailey was at pains to reiterate the position, as he sees it, that the bank is not taking a laissez faire attitude to inflation that sees the bank waiting to see how the situation develops.

Bailey said: “A, activity in the economy is slowing. B, the proximate cause of many of these inflation issues is on the supply side, and monetary policy isn’t going to solve those directly … it doesn’t get more gas, more computer chips, more lorry drivers. And C, however, the concern for us is what they classically call ‘second-round effects’, particularly in wage bargaining and the labour market … If the economy evolves in the way the forecasts and reports suggest, we’ll have to raise rates. Which, by the way, is entirely consistent with what I said in October.”

Risk inflation can become embedded downplayed

But if its is demand that is at least equally to blame for higher inflation and companies are able to raise prices without dampening that demand, then there is a risk of general price rises becoming embedded.

Vacancies in the labour market are at record highs and data showed unemployment falling last week, but there is no sign that wage increases are spreading beyond certain sectors such as HGV drivers. The bank had previously said it wanted to see how the ending of the furlough scheme in September would impact unemployment. It turns out it hasn’t led to a spike in unemployment.

Bailey pointed out hat hiring in the public sector is running at between 200,000 and 300,000, adding to tightness in the labour market: that could start to feed through into demands for higher wages, forcing companies to increase prices further, leading to a spiral effect.

Last week’s UK employment readings will add to the case for an interest rate rise from the current 0.1%. CPI inflation is 4.2% and RPI 6.0%