As the UK’s economic outlook gets cloudier, Bank of England policymakers are suddenly speaking more clearly about the choice before them.
(Bloomberg) — As the UK’s economic outlook gets cloudier, Bank of England policymakers are suddenly speaking more clearly about the choice before them.
After disappearing for holiday for much of August, Governor Andrew Bailey and his Chief Economist Huw Pill have returned suggesting they’re weighing when to halt the most aggressive tightening cycle in over three decades. Another policy maker, Catherine Mann, meanwhile signaled she’ll vote for more hikes.
The remarks indicate that debate is intensifying on the nine-member Monetary Policy Committee about how the BOE should respond to inflation that remains the worst in the Group of Seven nations. With the UK economy shrinking sharply in the first month of the third quarter and surveys raising the risk of a recession, officials have been unusually candid about the choices they face.
Their comments also reflect the fire the BOE is under from members of Prime Minister Rishi Sunak’s Conservative Party, who have fault Bailey for failing to move fast enough to contain inflation and think he may repeat the mistake as those pressures recede. For seasoned BOE watchers, the result may be a course-correction in a series of 14 consecutive rate hikes.
“We’ve had several comments now, which in isolation don’t necessarily send a particularly strong signal, but I think it’s when you add it all together,” said James Smith, developed market economist at ING, who reads the latest comments as “laying the ground for a pause.”
Investors are leaning toward another quarter-point increase in the BOE’s key rate from 5.25% at the meeting on Sept. 21, but doubts on markets over further hikes have mounted in recent weeks.
The odds of another hike after that are now just above 50-50, with investors cutting their peak rate bets by almost 20 basis points since the August vote. That’s a big shift in less than a month from the more than 6% that investors were pricing in for peak rates as recently as Aug. 17.
While the BOE was first among the major central banks to start raising rates, inflation at 6.8% remains almost double the level in the US and still well above the euro area rate at 5.3%.
But with the economy slowing, signs of the labor market weakening and the BOE estimating that much of the hikes to date have yet to hit the economy, the tone has shifted. Bailey, Pill, Deputy Governor Jon Cunliffe and external rate-setter Swati Dhingra have all stoked speculation with comments in recent weeks talking up the prospect of a turning point.
- Bailey said monetary policy is “much nearer now to the top of the cycle,” warning that previous tightening still has to come through the policy pipeline.
- Cunliffe pointed to “mixed signals about the economy,” which is “what you expect when you come into periods where you might be close to turning points.”
- Dhingra, the most dovish BOE rate-setter, said that policy is “already sufficiently restrictive” and is consistently voting to hold rates steady.
In notably clear messaging at an appearance in Cape Town on Aug. 31, Pill advocated a “Table Mountain” path for rates, a reference to the flat-topped landmark looming over the city. His suggestion is that instead of continuing to hike borrowing costs before later cutting, the BOE could deliver sufficient restraint to the economy by leaving them elevated for a longer period than markets expect.
That speech was remarkable for the BOE’s often tight-lipped internal rate-setters — the governor, chief economist and three deputy governors — who usually avoid comment on the forward profile for rates.
While the US Federal Reserve releases “dot-plots” showing the outlook for each of its policy makers, the BOE’s internal rate-setters have restricted how much they reveal, particularly after a number of data surprises in the UK. The closest British investors have to a dot plot is in the fan charts projections, which point to where the BOE expects inflation and growth to head based on the current market expectations for rates.
The BOE’s practice has left investors surprised at some of the bank’s decisions and often triggers criticism, most notably when a member of Parliament called former Governor Mark Carney an “unreliable boyfriend.”
Bailey is starting to answer those concerns by naming former Fed Chair Ben Bernanke to review the BOE’s economic modeling and communication. He’s also defended criticism about “group think” at the BOE, noting deep divisions about how policy makers should address inflation from here.
The evolution in communications started at the August meeting, when the BOE added to guidance that has largely been untouched and repeated throughout the year. In addition to the usual pledge to tighten policy if evidence of inflation persistence continued, it included words vowing to leave rates in restrictive territory for a prolonged period. It was the first time in the cycle that rates were deemed to be in “restrictive” territory.
The internal rate-setters until now have opted for a “very deliberate fuzziness” in their communications, an ambiguity that could be to avoid giving “too firm a signal only to be wrong-footed by the data,” said Andrew Goodwin, chief UK economist at Oxford Economics.
“There seems to be reluctance for Bank of England MPC members to nail their colors to the mask quite as explicitly,” he said. “The externals seem to be much more comfortable with expressing their view.”
The comments from the MPC are not all pointing toward a pause. Catherine Mann, an external member of the panel, said officials should “err on the side of tightening” to ward off more persistent inflation.
Economic data since August have been mixed. Wages excluding bonuses are rising at a record pace, but job losses are beginning to mount, and new job vacancies are falling. While inflation has fallen from a peak of above 11%, there are still signs of stickiness in services and core prices.
When he appeared before lawmakers last week, Bailey was careful to note that he has yet to decide about how to vote on Sept. 21. But he also avoided hawkish remarks that in previous months came ahead of the sharpest hikes.
“My impression is that they’re saying, ‘OK, don’t get too excited about further rate increases,’ but simultaneously I get the sense that they’re trying to extend the period where rates are going to remain high,” said Stephen King, senior economic adviser at HSBC Bank Plc in London.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said “the end of the tightening cycle is not far off now” but will likely come after September’s vote.
“The persistence of excessively vigorous wage growth in July probably means the MPC can’t stop raising Bank Rate at this month’s meeting,” he said.
Read more:
- Bank of England Governor Signals Rate Hikes May Be Near an End
- BOE Chief Economist Favors ‘Table Mountain’ Path for Rates
- BOE’s New Deputy Governor Says UK Faces Two-Year Stagnation
- Bank of England’s Mann Signals Support for More Rate Hikes
–With assistance from Andrew Atkinson and Eamon Akil Farhat.
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