© Reuters. Marcus Ashworth writes: The Bank of England and the US Federal Reserve may regret not stopping the rate hike
The BoE played on the safe option at last Thursday’s Monetary Policy Committee meeting by tightening policy for the 11th consecutive time.
And he decided by a vote of 7 to 2 of its members to raise the interest rate by 25 basis points to 4.25%, with the remaining two not wanting to make any change. Monetaries may end up regretting their reluctance to stop raising rates even if temporarily.
The Bank of England’s Monetary Policy Committee statement confirmed that further hikes may be needed, pointing to a stronger global backdrop since the last quarterly monetary policy report. a contraction of 0.4%. In the opinion of the Monetary Policy Committee, the UK banking system remains resilient, meanwhile, the futures market prices one additional hike in the interest rate, to 4.5%.
From here, both banks in the United States and the United Kingdom chose to be neutral, as they were confused about which path to take.
There is reluctance to continue with the primary task of fighting inflation, or to focus on the recent banking meltdowns that have thrown the financial sector into turmoil.
Financial stability is an integral part of their mission. This should translate into resisting the temptation to raise rates until something new comes along – but it is already too late.
Implementing an immediate increase in interest rates and giving cautious hints about a future hike is a form of indecision. If policymakers are really concerned that problems in the banking system could make it difficult for businesses and consumers to get credit, then why do anything about monetary policy? Why don’t you stop until the smoke clears?
It also makes sense to pause and assess the effects of a year of continuous interest rate increases on their respective economies. And as recently as March 7, Federal Reserve Governor Jerome Powell said he was ready to raise 50 basis points, so why hesitate to be flexible in the other direction?
The economic picture is certainly getting murkier in the UK, with employment data finally showing some signs of abating. Inflation surprisingly rose in February to 10.4% y/y from 10.1%, decimating the quibbles of Bank of England Governor Andrew Bailey at the start of March. When he asked whether the interest should be changed.
But some of the sudden jumps in food prices, the fastest in 45 years, are likely to be “temporary”, due to bad weather in Spain and North Africa, where much of the UK’s winter supply of salad produce is grown.
There was a review of the basket of goods and services that were evaluated in February, however, it must be recognized that the rise to a double-digit inflation zone is too great for any self-respecting central banker to bear, but a 25 basis point hike after 10 previous moves also does not solve anything. Inflation exceeded expectations 15 times in 26 monthly readings since the beginning of 2021.
The Bank of England’s inflation forecasts over the next three years point to a drop in the consumer price index to zero, and it has also revised its expectations for the second quarter with a further decline in the inflation rate.
As well as the fact that Chancellor of the Exchequer Jeremy Hunt’s extension of the energy price guarantee in the budget he delivered on March 15 should directly underpin the fall in inflation through April at some point policy makers should act on their own expectations rather than stick to fighting wars just because they are the wars they are used to. on her.
So far, the banking turmoil has not directly affected the UK banking system, so acting very cautiously about financial stability is not urgent, but in the aftermath of the government bond crisis in the fall, the financial system would have been on the verge of collapse had it not been for the Bank of England’s intervention as buyer. At the last moment, so the luxury of error is minimal.
Despite the opposition to it, Thursday’s rate hike may be the last, except in the event that inflation does not show any improvement, but inflation is expected to slow according to the expectations of the Bank of England analysts themselves, government expectations and market analyzes, and the next major battle will be for the Federal Reserve and the Bank of England alike. It is an attempt to resist market expectations that bet on sharp interest rate cuts later in the year.
By: Marcus Ashworth
Opinion writer for Bloomberg
