- We have to monitor the situation in the Middle East
- Need to see how it affects the UK economy and inflation very closely, and adjust policy as required
- In having taken expected rate cuts off the table for now, we have already tightened policy considerably
- That is in response to the shock relative to what had been expected by markets
- Economic weakness and uncertainty surrounding the war means tolerating temporarily above target inflation is an appropriate way to approach the policy tradeoff
- However, that tolerance would weaken if signs of second-round effects begin to emerge
On the headline remark, he’s not wrong. That being said, the opposite is also true. With markets now leaning more towards pricing in hawkish steps by the BOE, not raising interest rates this year will end up loosening monetary policy instead. So, there’s that for Bailey & co. to consider.
Much like all major central banks right now, the BOE also wants to play for optionality for as long as they can get away with it. Policymakers all want to wait to see how the US-Iran conflict will change next and they will be hoping for more clarity when an agreement is eventually announced. However, that is not to say that the war will end and the Strait of Hormuz will be reopened immediately. In fact, the reality of the situation may be far from that.
The BOE for now looks to be putting off a rate hike next month but market pricing suggests that the central bank will have to take action at some point closer to the summer. Traders are pricing in ~32 bps of rate hikes currently by year-end.
This article was written by Justin Low at investinglive.com.
