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Bank of England officials cool down interest rates hike talk

·3-min read
NEW YORK, Jan. 10, 2020  -- Catherine Mann, global chief economist at Citi, speaks at a panel themed on
Catherine Mann, a former chief economist at the Organisation for Economic Co-operation and Development (OECD) said the bank could hold off on raising rates. Photo: Xinhua/Wang Ying via Getty Images

Two members of the Bank of England’s (BoE’s) Monetary Policy Committee have struck a “wait-and-see” tone regarding interest rate hikes, widening a split about how to combat rising inflation.

Catherine Mann and Silvana Tenreyro have warned against an early rise due to a recent surge in energy prices and ongoing supply chain disruptions, which have caused a shortage in materials and components.

They said that the inflationary effects of these issues need to be seen before voting for a rise in borrowing costs.

According to the Office for National Statistics (ONS), inflation is currently at 3.2%. The BoE projected it to rise temporarily in the near-term, to 4% in the fourth quarter of 2021, owing largely to developments in energy and goods prices.

But it said CPI inflation was expected to fall back to close to the 2% target in the medium-term.

Watch: What is inflation and why is it important?

However, Tenreyro said a rate hike could be “self-defeating” if inflationary pressures turn out to be temporary.

“By the time interest rates were having a major effect on inflation, the effects of energy prices would already be dropping out of the inflation calculation,” she said.

“If some effects were to prove more persistent it would be important to balance the risks from a period of above target inflation with the cost of weaker demand.”

The former London School of Economics professor pushed for negative interest rates earlier this year.

Analysts at Nomura said the issue was “with the human element”.

“We think this could be a BoE cycle like no other. The inflation we are seeing now is not just demand-led, as it was in previous cycles, but there is also a supply aspect that seems to be causing the market moves we are now experiencing,” they said.

“If we focus on slowing growth and the risks ahead, it seems unclear why the MPC should hike now, but labour markets and inflationary pressures argue the opposite."

Read more: Expectations grow of a UK interest rate hike before Christmas

Its view is for a later rate hike than what the market appears to believe, with a 15bp rise in August 2022, followed by hikes in February and November 2023.

Meanwhile, Catherine Mann, a former chief economist at the Organisation for Economic Co-operation and Development (OECD) said the bank could hold off on raising rates as traders were already doing some of its work by betting on tighter monetary policy in Britain and the US.

Investors are currently betting that Threadneedle Street will raise interest rates before the end of the year, making it the first major central bank to do so since the start of the coronavirus pandemic.

Interest rates in the UK have been kept at record lows of 0.1% since March 2020.

Read more: Inflation fears: UK supply chain cost pressures filter into prices

The dovish comments come as some of the bank’s monetary policy committee (MPC) members are adding pressure to increase the cost of borrowing earlier than previously expected, in a bid to counteract the issue of higher, and potentially longer lasting inflation.

Last weekend, governor Andrew Bailey raised concerns about inflation and said he was uneasy about consumers starting to see the rise as a permanent feature, while MPC member Michael Saunders told The Sunday Telegraph he expects the cost of borrowing to go up “significantly earlier”.

Over the summer, there were two changes to the MPC, the departure of Andrew Haldane as chief economist and external member Jan Vlieghe, replaced by Huw Pill and Catherine Mann, respectively.

Nomura said the changes are for a less hawkish committee with Pill and Mann, than would have been the case under Haldane and Vlieghe.

Watch: Will interest rates stay low forever?

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