Britain’s policymakers are toughening their stance on inflation as they prepare to deliver a tough dose of “medicine” at a time when the cost-of-living crisis is hurting growth and consumers, according to Bloomberg.
The government of Prime Minister Boris Johnson, together with the Bank of England, this week signaled their readiness to raise interest rates at an unprecedented rate to keep prices on an upward trajectory of more than 11% this year.
Remarks by the Treasury and the central bank suggest a shift in policy emphasis from supporting growth to curbing wage-inflated inflation and triggering a 1970s-type price spiral.
The moves follow the biggest rise in US interest rates since 1994 and calls on the BOE to step up its monetary tightening.
“The rhetoric has gone up a notch, with the Bank saying it may need to act ‘vigorously’ if needed,” said George Buckley, an economist at Nomura Holdings Inc. in the UK.
Johnson has voiced concerns about inflation in recent weeks and returned to the issue on Monday, warning that the UK is heading for a difficult time.
“We are seeing the effects of inflation around the world on this country, as elsewhere,” he said at an event in Cornwall. “We have an inflationary inflation that we have to overcome.”
The BOE joins US and Swiss counterparts in raising interest rates over the past 24 hours
On Tuesday, government figures showed that real wages were falling at the fastest pace in two decades.
The BOE raised its benchmark lending rate by a quarter on Thursday to 1.25%, the highest level since 2009, and hinted that it could increase the tightening rate at its next meeting in August.
BOE chief economist Huw Pill suggested on Friday that further indications that inflation is leading to higher wages or store prices could lead the bank to raise interest rates by half a unit. Investors are betting that the BOE will make several huge increases this year, bringing the key interest rate to 3%.
The economy shrank unexpectedly in April
Finance Minister Risi Sunak made it clear that he expects interest rate makers to bring inflation expectations under control.
“I know and expect that you will take the necessary steps to bring inflation back to target and ensure that inflation expectations remain firmly entrenched,” Sunak wrote in a letter to the BOE.
The exchange of letters is required after interest rate meetings when inflation is more than 1 point away from the 2% target. Inflation is currently 9% and the BOE expects it to rise further.
The outlook for interest rates came amid evidence that the economy shrank in the quarter to June and signs that consumer confidence was collapsing.
The scale of action expected by the markets is unprecedented in the modern history of the BOE. The bank has never raised interest rates by more than a quarter on a single meeting in its 25 years of independence.
There has been a noticeable hawkish shift across the policy-making committee, with two members who were reluctant to raise interest rates now signing the “dynamic” lead. Pill told Bloomberg Television on Friday that the old guidance was “a bit stale.”
He also reinforced the message that inflation expectations are paramount, saying: will be the trigger for the most aggressive action “.
All attention now seems to be focused on not expecting inflation expectations to lose the 2% anchor. Short-term expectations are “close to their record high,” the BOE said on Thursday, and “medium- and long-term expectations remain above their historical averages.”
Sunak’s letter was significantly more substantial than previous exchanges, with clear concern that inflation could become rampant.
“It is imperative that we bring inflation back to target and keep it anchored there,” the chancellor wrote.
He also replaced the pleasant phrase, “I welcome the committee’s intention to take whatever action is necessary” with a more instructive one, “I welcome the Bank ‘s readiness to take decisive and firm steps to achieve this.”
The BOE has come under pressure to move faster and harder, with several members of the ruling Conservative Party criticizing it recently for allowing prices to soar and many economists to say it was too slow to react.
Mel Stride, chairman of the House of Commons’ cross-party finance committee, said some of Bailey’s communications were “clumsy”.
Peel told Bloomberg Television that the BOE could do nothing about immediate short-term inflationary pressures.
“We know this is going to increase because of energy price movements and other things that we can not really limit in the short term.”
Source: Capital
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