BOE Officials Signal Bigger Interest Rate Rises May Be Coming

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(Bloomberg) —

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Two senior Bank of England officials signaled they’re prepared to hike interest rates at quicker pace if needed to prevent inflation from becoming embedded, adding to evidence that a half-point move is on the table as soon as next month.

Chief Economist Huw Pill said the BOE’s latest guidance showed a willingness to accelerate their hiking cycle if necessary. That came hours after Deputy Governor Jon Cunliffe said the BOE “will do whatever is necessary’ to prevent inflation from persisting, promising officials “will act and we will act forcefully.” 

The remarks are among the clearest signal yet that BOE insiders such as Pill and Cunliffe, who have previous expressed doubts over lifting rates in a 50-basis-point step, may consider such a move in August. The BOE has hiked rates at five straight meetings, so far moving in smaller increments than some of its international peers.

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The BOE’s vow in June to “act forcefully” to persistence in inflation “reflects both my willingness to adopt a faster pace of tightening than implemented thus far in this tightening cycle, while simultaneously emphasizing the conditionality of any such change in pace on the flow of new data and analysis,” Pill said in a speech in London.

“Much remains to be resolved before we vote on our August policy decision. How I vote on that occasion will be determined by the data that we see and my interpretation of it,” he added.

He also left the door open toward a smaller move, noting that the BOE has “finely balanced” decisions in August and beyond and that there’s a case for operating policy with a “steady hand.” Bold moves,” he said, can disrupt markets.

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Pill also said the BOE’s updated guidance was designed to give greater flexibility to its communication, and reflected both the uncertainties the BOE face and the likelihood that future decisions may become more finely balanced as officials weigh the competing forces of faster inflation and lower growth.

He acknowledged that the BOE’s previous guidance wrong-footed investors about when policy makers would start their tightening cycle last year. Then, a series of officials reiterated that tightening was needed.

“Not only did this give a false — and thus misleading — impression that Bank Rate was set to move mechanically and unconditionally upward over the coming months, but it also discouraged markets from pricing the macroeconomic risks to the interest rate outlook,” Pill said.

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Pill said officials will prioritize “the more persistent component of inflation developments over the headline spot measure” when it comes to making decisions. 

For now, he said inflation expectations remain “anchored,” but that the BOE are watching them closely for the risk price pressures become embedded. Consumer-facing firms, he said, probably have little pricing power, but business suppliers may have more ability to raise the cost of their products, he said.

“I think we probably need to tighten further,” he said during a question-and-answer session after the speech, adding that the question is about what pace the BOE should move.

“There’s a general point that central banks have more leverage and more effective transmission of their policies if they’re acting in this steady handed and this sort of lower frequency way,” Pill said. “One off bold moves can be disturbing in terms of their impact on the financial markets. There is a case for this more steady handed approach.”

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The bank has already increased rated to 1.25%, from 0.1% last year in an effort to contain price gains. Consumer prices are rising at the fastest pace in 40 years after a surge in energy costs, well above the BOE’s 2% target. Cunliffe emphasized the goal during an interview with BBC Radio 4’s “Today” program.

“It’s our job to make sure that as this inflationary shock passes through the economy, at a time when we have also have a tight labor market, we don’t find that a combination of a strong shock from abroad and energy prices combines with domestic factors and leaves us inflation being the new normal,” Cunliffe said in the radio interview. “People can have confidence that we will act to make sure that doesn’t happen.”

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He said policy makers are looking at “domestic factors” that are driving inflation and whether any of those indicate “persistence” in the pace of increases.

“Once an inflationary psychology becomes embedded we all become poorer,” he said. “We can’t do anything about the fact that we have to pay more abroad for our energy and for our food. That’s a hit we have to take. We have to ensure that when we come out of this we will come out with inflation back at the 2% target.” 

Cunliffe’s interview was taped Tuesday, before Rishi Sunak resigned from his post as chancellor of the exchequer in a move that has destabilized Prime Minister Boris Johnson’s government. Pill said he didn’t want to comment on fiscal policy, especially in the light of last night’s events.