Breaking News
Investing Pro 0
Cyber Monday Extended SALE: Up to 60% OFF InvestingPro+ CLAIM OFFER

BoE set to walk the line between inflation and recession

Economy Apr 27, 2022 15:40
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: The Bank of England (BoE) building is reflected in a sign, after the BoE became the first major world's central bank to raise rates since the coronavirus disease (COVID-19) pandemic, London, Britain, December 16, 2021. REUTERS/Toby Melville
 
TGTB34
0.00%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

By William Schomberg

LONDON (Reuters) - The Bank of England next week will try to walk what Governor Andrew Bailey calls a "very tight line" between tackling inflation speeding way above the BoE's target and not triggering a recession.

The BoE is expected to raise interest rates at a fourth meeting in a row on May 5, the first time it has done that since 1997, as it moves faster than other central banks to tackle the surging price growth that they once described as transitory.

Financial markets have fully priced in a quarter-point rise in Bank Rate to 1.0%, its highest since 2009, and investors are more focused on what the BoE signals about its next moves.

Bracing for a big hit to household incomes, the BoE in March toned down its message about rate hikes, saying "some further modest tightening might be appropriate in the coming months," having previously said it was likely.

Since then, inflation has accelerated to 7%, more than three times the BoE's target. But the economy is also showing slowdown signs, deepening the BoE's dilemma.

"We are now walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession," Bailey said last week.

The BoE may try to convince investors again that it will not raise rates as much as they expect. Rate futures are pricing Bank Rate hitting 2.25% by the end of this year with an outside chance of a 50 basis-point hike next week.

But markets are also heeding the weakening economy. Sterling fell to a 21-month low against the U.S. dollar on Wednesday.

Economists polled by Reuters mostly expect Bank Rate to rise to 1.5% by early 2023 and stay there throughout the year.

Not everyone agrees. Consultancy Capital Economics thinks the BoE will have to take rates to 3% in 2023 after inflation hits 10% this year and the tight labour market pushes up pay.

Data on Wednesday showed employers were starting to offer the biggest annual pay rises since 2008, but the increases were still not keeping up with inflation.

"Admittedly, by focusing on containing any second-round effects on wages and prices, the Bank risks tipping the economy into recession," Capital Economics' Paul Dales said.

INFLATION TARGET SIGNAL

As well as the BoE's language next week, its inflation forecasts will signal how quickly it might raise rates.

In February it saw inflation falling to 1.6% in three years' time, based on investors' bets on future rate hikes. That was the biggest projected undershoot of its 2% target in a decade.

The war in Ukraine has added to immediate price pressures and the BoE might raise its 8% inflation peak forecast. But the slowing economy could push its medium-term inflation forecasts even lower than in February.

Consumer confidence has slumped close to a record low, retail sales have fallen for two months and there have been some early hints of a slowdown in job creation, potentially easing the BoE's fears about a price-wage spiral.

"The latest data are starting to vindicate its expectation of a demand slowdown," HSBC economist Elizabeth Martins said.

She expected eight of the BoE's nine rate-setters to vote for a 25 basis-point rate increase with Deputy Governor Jon Cunliffe again voting to keep Bank Rate unchanged, repeating March's vote pattern.

In February, before the slowdown signals, four MPC members voted for a 50 basis-point rate hike. Five backed a 25 basis-point increase.

The BoE might also hope to show it can tackle inflation without a string of new rate hikes by detailing how it will sell down the almost 850 billion pounds ($1.1 trillion) of government bonds it holds after a decade of asset-purchase stimulus.

The central bank has previously said it would consider beginning bond sales when Bank Rate hits 1%.

($1 = 0.7957 pounds)

BoE set to walk the line between inflation and recession
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
David James
David James Apr 27, 2022 16:15
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The Bank of England Governor and MPC should all be sacked for their utter failure to control inflation. They need to take a look at imported inflation from the pound that they have devalued. Next round of inflation is incoming with the pound at 1.25 against the USD.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email