Two Bank of England deputy governors signaled on Thursday that they are moving closer to backing an interest rate increase, as persistently high energy costs raise the risk that inflation gets stuck at elevated levels. Investors are now pricing a 75% chance of a quarter-point hike at the BoE's November meeting, with a further move fully priced in by February.
Clare Lombardelli and Sarah Breeden, who both voted to hold the BoE's benchmark rate at 3.75% last week, said Thursday they are considering shifting position. Lombardelli, speaking in Warsaw, cautioned that a longer stretch of high energy costs would raise the risk of spillover into wage bargaining, price-setting and inflation expectations.
Two deputy governors sound the alarm
Breeden, speaking separately at the London Macro Policy Forum organised by the National Institute of Economic and Social Research, struck a similarly cautious tone. She said the risk of an inflationary flare-up is rising and that the central bank may increasingly need to respond. Breeden added that the BoE would watch closely for signs of how large the energy price shock proves and how much of it filters into the broader economy.
However, a third Monetary Policy Committee member struck a less urgent note. Swati Dhingra, one of the strongest advocates of lowering borrowing costs when the BoE was cutting rates, said the extent of long-term inflation pressure in Britain caused by the Iran war would become clearer over the coming winter months. She said Britain is not experiencing the kind of broad-based price rises that occurred in 2022, when energy prices jumped after Russia's full-scale invasion of Ukraine, and that the UK jobs market is now weaker.
BoE has held while the Fed and ECB moved
Britain's central bank has so far not followed the U.S. Federal Reserve and the European Central Bank, both of which have raised rates. But it warned last week it might follow suit if the Iran war drags on, and forecast that British inflation will top 4% early next year — more than double its 2% target.
Governor Andrew Bailey has said the BoE's decision not to follow through on expected rate cuts earlier this year, after the start of the conflict in the Gulf, had done much of the job of tightening financial conditions in markets. But last week, referring to the rise in energy prices, he said, according to Reuters: "the longer this goes on, the more difficult this becomes." Bailey is due to speak publicly on Friday.
Markets lean toward a November move
Investors are assigning a 75% chance of the BoE raising its Bank Rate by a quarter of a percentage point at its next meeting in November, with another rate hike fully priced in by February. Analysts at Investec said they now saw the probability of the BoE moving at its next MPC meeting, pointing to the risk that committee members' patience wears out absent a breakthrough in talks to restore energy flows through the Strait of Hormuz.
Source: Investing.com
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