Aurelia Butler

Thursday at noon was the moment the Bank of England got really tough with the British public. To return inflation from an expected peak of 7.25 per cent in April to the central bank’s 2 per cent target, the BoE announced action that will hurt most households at the worst possible moment. The BoE monetary policy committee’s members voted five to four in favour of raising official interest rates from 0.25 per cent to 0.5 per cent, with the minority wanting a larger half-point increase. This came shortly after the regulator Ofgem said the energy price cap, affecting about 22mn households, would rise 54 per cent to an average of £1,971 a year from April.The move laid bare how Britons are contending with a cost of living crisis, in which surging energy prices propelled consumer price inflation to a 30-year high of 5.4 per cent in December.The BoE also announced it had begun quantitative tightening of the £895bn stock of assets it has bought to stimulate the economy since the financial crisis. Initially the BoE will no longer reinvest the proceeds from government bonds it holds when they mature, reducing the total by £70bn over the coming two years. Andrew Bailey, BoE governor, was clear that this was not the end of the tough love for the British public, saying he felt he had to give a “hard message”. “We are facing a squeeze on real incomes . . . and it is necessary for us to raise interest rates because if we don’t do that, the effects would be even worse,” said Bailey.He added there would probably be more “modest” rises in interest rates in the coming months, because the MPC’s forecasts showed inflation staying above 2 per cent throughout the next three years if it left them at 0.5 per cent.Since November, the committee has been spooked by just how much it failed to anticipate the surge in inflation and the spread of price growth pressures beyond energy.Most troubling for the BoE was information from its regional agents showing companies expect pay settlements to rise to 4.8 per cent in 2022 amid a hot labour market, while a central bank survey found businesses saying they would raise prices by a similar amount. Financial markets’ expectations of inflation in the medium term are similarly high.Tighter monetary policy to address this concern about high inflation would have multiple effects, according to BoE officials.Bailey said part of the way higher interest rates would work was to make borrowing more expensive and life harder for households, but he also wanted to send a message to companies as well as consumers that they should expect inflation to fall back to 2 per cent.If businesses did not, and kept raising prices by around 5 per cent or more, the thinly veiled warning from Bailey was that he would play even rougher to get inflation under control. The effects, he stressed, would not be pleasant. Inflation would be higher, economic growth lower, incomes falling and unemployment rising.In its forecasts, the MPC showed the UK economy would grow 1.8 per cent in the coming year before slowing to an anaemic average 1 per cent for the following two years, with the unemployment rate rising from a low of 3.8 per cent to 5 per cent. These forecasts were considerably worse than those in November, reflecting the 2 per cent cut the BoE expects in real household disposable incomes during 2022 as pay and benefits fail to keep pace with price growth. Economists and financial market traders almost universally took the view that the BoE was taking a very hawkish stance, especially following a knife-edge MPC vote that almost involved interest rates rising half a percentage point. That has not happened since the central bank gained operational independence to set monetary policy in 1997.Allan Monks, economist at JPMorgan, said there were “some significant hawkish surprises in [the BoE’s] communications” such as the hint that the next rate rise might be as early as March.Steffan Ball, economist at Goldman Sachs, said the BoE language was consistent with another two increases in rates in the next three months, taking them to 1 per cent by May.But Bailey was keen to stress his message was not that the BoE had turned into an inflation-fighting warrior, seeking to increase the cost of borrowing whatever happened.He repeatedly pointed to the MPC’s forecasts showing inflation would fall below the central bank’s 2 per cent target in three years’ time if interest rates followed market expectations and rose to 1.4 per cent. “Please don’t get carried away,” he urged journalists looking at the forecasts. “There is a downside to this forecast that would end up with less action being taken than some observers think.”But there was a double-edged sword lurking in the governor’s comments. If energy prices were to fall, giving households some respite, the implicit warning was this was likely to create too much growth and an even hotter labour market, so the BoE might still have to raise rates in these circumstances. The BoE has not had to play bad cop for the past 15 years of low interest rates.The central bank did not like the message it sent on Thursday, but Bailey was clear that the UK would be even worse off if the BoE did not clamp down on what is now a serious inflation problem that has occurred on his watch. More

Asked by the BBC whether people should rein in their wage expectations, Bailey said: “In the sense of saying, we do need to see a moderation of wage rises, now that’s painful. “I don’t want to in any sense sugar that, it is painful. But we need to see that in order to get through this problem more quickly.”Earlier on Thursday, the BoE raised interest rates for the second time in two months, taking Bank Rate to 0.5%. Nearly half its policymakers wanted a bigger increase to 0.75%.The central bank said consumer price inflation – which was 5.4% in December – should peak at around 7.25% in April and post-tax income for working households would fall by 2% this year even as it trebled its forecast for wage growth this year to 3.75%.The squeeze on living standards is turning into a political problem for Prime Minister Boris Johnson and finance minister Rishi Sunak who on Thursday announced measures to soften a hit to households from a jump of more than 50% in domestic energy tariffs starting in April, when taxes are also due to rise.Before his BBC interview, Bailey told reporters that Britain was not at risk of a wage-price spiral.”What we are saying (…) is that we are seeing upward movement in what firms expect to be wage settlements,” he said.”After adjusting for all the sort of the various COVID effects on the data, I think the underlying rate of wage growth is somewhat higher than we would expect it to be at this point in the cycle.” More

WASHINGTON (Reuters) – The U.S. Federal Reserve needs to begin raising interest rates but it is too soon to say how far or fast that process will need to go to bring inflation under control, Richmond Federal Reserve president Thomas Barkin said Thursday.He said it remained uncertain, given the ongoing pandemic and the tangled state of global supply chains, whether U.S. inflation would dip on its own back towards the Fed’s 2% target, or be driven persistently higher by rising wages, higher input costs, and businesses developing more aggressive pricing strategies.With the Feds’ target policy rate still near zero, he said, the immediate challenge is “to get ourselves in a better position to do what we might need to do should the least optimistic scenario come true, while not constraining the economy” in the meantime, Barkin said in a Reuters interview.”It is a straightforward call to say we ought to get rates back into better position,” Barkin said, but with so much unknown, “it does not feel to me like there is enough information to say holy cow we have to restrain the economy right now.”His comments were a more tempered view of a situation that has prompted some market analysts to conclude the Fed has lost control of inflation and will be forced to raise interest rates faster and higher than anticipated — potentially putting the economic recovery at risk. Prices currently are rising at levels not seen since the early 1980s.The Fed at its March meeting is expected to raise the target interest rate by a quarter of a percentage point from the current near zero level, and provide some guidance on how it intends to proceed from there. Barkin would not say how many rate increases he anticipates will be appropriate this year. Investors have priced 5 quarter point hikes into contracts linked to the federal funds rate, and his colleagues talk in terms of 3 to 5.Barkin said that in general he feels the federal funds rate should be increased to where it was just before the pandemic — at the end of 2019 it was set in a range between 1.5 and 1.75% — before reassessing how much more might be needed.He did not specify a timeline for that, and said the behavior of inflation could swing policy in either direction.”Pre-pandemic levels are the place to reassess. Where we were pre-pandemic was under every member of the (Federal Open Market Committee’s) assessment of where neutral was,” meaning the Fed at that point would not be actively restricting the economy, Barkin said. “Then we can look around and say do you want to then start to move into the range … where we are starting to restrain?”At this point, Barkin said, it remains uncertain what will happen in the economy once the effects of the pandemic lift more fully. As it is, millions of workers might be sidelined sick at home in a given week, or global hubs like China have parts of their manufacturing base shut down at any given time.That makes it difficult to judge how prices and employment will behave once pandemic risks recede, Barkin said, and hard to anticipate how monetary policy will need to respond.“Covid is still here. Still influencing supply chains. Still influencing demand,” Barkin said. At this point “I don’t know how to declare the regime we are in.” More

International Monetary Fund spokesman Gerry Rice told Reuters that the fund did not comment on leaks of draft documents. But he said the Jan. 28 statement issued by staff after an Article IV surveillance mission to Japan did include “robust analysis on the issue of climate change.”Reuters reported Wednesday that the Jan. 28 concluding statement omitted a sentence included in an earlier draft, which said global efforts on climate policy would benefit if Japan ended exceptions from its pledge to end financing of new unabated coal projects.The IMF initially declined to comment, but offered a longer statement on the Article IV surveillance process on Thursday.Climate activists said deletion of the passage on coal from the staff’s concluding statement was disappointing coming so soon after the IMF board agreed to focus more on climate change in its surveillance of countries’ economies.The report did include a section entitled “Shifting to a Low-carbon Economy” that made no mention of coal but said meeting carbon emissions reduction goals would be especially challenging for Japan given its heavy reliance on fossil fuels for energy since a 2011 earthquake and tsunami.Rice also noted that decisions on concluding statements were made by the staff country team. Management and the board were only involved in the next phase of the Article IV surveillance process, which leads to publication of a more detailed staff report. More