Cautious statements by the governor of the Bank of England about inflation and interest rates

Source link: Bank of England governor's cautious comments on inflation and interest rates at a glance Andrew Bailey said the secondary effects of rising energy prices on other prices have so far been limited, but it is still too early to judge. He described above-target inflation as "very disappointing" and said news from the Middle East was the most important factor affecting UK government bond yields. The interest rate increase in the November 5 meeting is still ruled out […] Source site: Safir Ar

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Bank of England governor Andrew Bailey said on Friday that rising energy prices had so far had a limited effect on other prices in the UK, but it was too early to assess the full implications. These statements do not rule out the possibility of an interest rate increase at the next meeting of the central bank, but it is not a sign that it is imminent.

Bailey, who was speaking at the annual meeting of the International Monetary Fund in Bangkok, coinciding with the annual meetings of the International Monetary Fund and the World Bank, said evidence of the "secondary effects" of rising energy prices has so far been inconclusive. Secondary effects mean the transfer of higher energy costs to wages and prices of other goods and services. According to him, companies are more focused on reducing costs than transferring these costs to customers.

However, Bailey called the above-target inflation in the UK "very disappointing". He said that the country's economy has been more resilient than the central bank expected, but it is still not strong enough. Bailey also considered Middle East news to be the most important factor affecting UK government bond yields.

The importance of these statements comes from the fact that the markets have seriously considered the possibility of an interest rate increase at the central bank meeting on November 5. The base interest rate is now 3.75%. At its September meeting, the Monetary Policy Committee voted 6-3 to keep rates unchanged, with three members calling for an immediate increase; Bailey also voted to keep the rate.

However, Bailey warned in late September that continued high energy prices would make it more difficult to keep interest rates unchanged. This change in tone had helped increase the market's expectation for higher rates.

His remarks on Friday were more balanced. The limited secondary effects are consistent with the central bank's assessment in September, suggesting Bailey is not yet convinced that the energy shock has taken root in the determination of wages and prices; An issue that is important to the majority of the members of the monetary policy committee. At the same time, his dissatisfaction with inflation shows that the central bank has little tolerance for the continuation of inflation above the target. Therefore, his comments do not rule out the possibility of a rate hike in November.

Bailey's emphasis on the role of Middle East news in the yield of government bonds shows how much the interest rate outlook in the UK depends on oil and gas prices and developments related to the Iran war. Rising energy costs again could strengthen the argument of those in favor of raising interest rates; On the other hand, the reduction of tensions in the Middle East can weaken this possibility.

UK inflation data for September due out next week, the October 28 Budget and the Central Bank's decision in November are key events ahead, along with fresh forecasts.