Bloomberg: Division in Bank of England will worsen because of stagflation outlook

12 December 2022 205
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Source: Bloomberg

Author: Philip Aldrick

Article: Original article

Publication date: Sunday, December 11, 2022

The worsening economic prospects of Great Britain will leave BOE’s politicians most divided in history over how much to raise interest rates. 

Investors are betting that on December 15, the Monetary Policy Committee will raise the key rate by 0.5% to 3.5%, the highest level in 14 years.

Nevertheless, growing concerns about a recession have caused debate about how aggressively the Bank of England should respond to inflation. This will force Chairman Andrew Bailey to struggle to find a consensus for a decision and possibly use his casting vote.  

George Buckley, a European economist at Nomura, said that there will be “heated debates, and we shouldn’t be surprised if this will lead to division”.

Inflation at a level of 11.1% exceeds BOE’s target of 2% more than five times. But the central bank forecasts a demand-draining recession that will dampen price increases and increase unemployment even if rates remain at their current level of 3%.

Markets and economists expect the BOE’s rate to peak in the 4-4.5% range. 

The situation is complicated by the hot labor market, where supply has declined so dramatically that employers are forced to pay higher salaries to their personnel. Experts are afraid that a weakening labor supply will make inflation even more difficult to curb.

At the same time, the central market from all over the world demonstrates signs of possible reversal when inflation seems to peak, and the US Fed recently showed the intention to slow the pace of tightening. BOE is unlikely to talk about rate cuts before inflation falls.

Sonali Punhani, Chief UK Economist at Credit Suisse, said that “the experience of the past few months has shown that inflation became widespread, so politicians are unwilling to cut rates prematurely.”

At the two last meetings, the BOE’s Committee was divided. Several members were worried about the remaining tension on the British labor market and signs of in the UK labor market and signs of rising inflationary expectations. Others feared that the influence of the rate hike would only reveal next year, just when the economy needed support.

In November, the majority of committee members indicated the additional tightening of policy would be necessary. Bank of America and Investec expect the rate to increase by 0.5% this month. Nomura waits for a 0.75% increase which is in line with the November move, the biggest since 1989.

Surveys show that the labor market “has turned”, a number of vacancies and employment are currently falling, but “the growth of salary remains too high”. Buckley admitted that the core inflation, excluding the price volatility for foodstuff and energy remains problematic at the 6.5% level.

Forecast: GBPUSD will decline

This content is for informational purposes only and is not intended to be investing advice.

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