- If we have prolonged high energy prices and supply disruption, it will strain many countries quite seriously
- We will have to act if appropriate, but tackling the source of the energy price shock is most important
- I'm very clear we need to return inflation to target in a way that causes the least damage to growth and jobs
- We look at inflation expectations very carefully, but short-run often follows headline inflation
- Businesses I speak to say they have a real lack of pricing power
- UK growth is below potential, labour market softening
- MPC may debate the case for a precautionary rate rise, but needs to judge that in the context of the remit and how to return inflation to the target
- Gilt market moves orderly but stretched, we're watching it hourly
- Need to watch out for investor loss of confidence in private credit
BoE Governor Andrew Bailey has emphasized that while the central bank is prepared to act if appropriate, the primary challenge remains tackling the fundamental source of the energy price shock, that is the disruption in the Strait of Hormuz. The goal for the MPC is to return inflation to its 2% target while minimizing the damage to economic growth and employment.
Bailey noted that the MPC monitors inflation expectations with extreme care. There is a recognition that short-run expectations often mirror headline inflation, creating a feedback loop that policymakers must take into consideration. Bailey noted that discussions with business leaders suggest many firms lack pricing power, which may act as a natural brake on inflationary pressures as the economy slows.
The broader macroeconomic indicators currently paint a picture of an economy under pressure, with UK growth remaining below potential and the labor market beginning to soften. The MPC may debate the merits of a precautionary rate hike, but also take the macroeconomic context into consideration.
The market is currently pricing in 52 bps of tightening by year-end (two rate hikes) and a 39% chance of a rate hike at the upcoming meeting. Bailey is trying to push back on such aggressive expectations as their bar for a rate hike is higher than market's.
