The comments are more balanced than Bailey’s late-September warnings, and could take a little heat out of heavily priced November hike bets in short-dated gilts and sterling, without ruling a move out. His point that Middle East news is the biggest driver of gilt yields puts oil and gas prices at the centre of the UK rate outlook: renewed escalation in the Iran war would lift energy costs and strengthen the case for a hike, while any easing would weaken it. Next week’s September inflation data and the 28 October Budget are the next catalysts.
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Background:
BOE, Bailey, Bangkok. What could possibly go wrong? Preview and 3 questions for the Governor
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Bailey is frustrated with inflation but not yet alarmed by it, which leaves November live without giving hike-hungry markets the nod they wanted.
Summary:
Bailey said second-round effects from high energy prices have been subdued so far
He said it is too early to form strong views, and that businesses are emphasising cost-cutting
He called above-target UK inflation enormously frustrating
The UK economy is more resilient than expected but not as strong as needed, he said
Middle East news is the biggest factor moving gilt yields, he said
Bank Rate is 3.75%, after a 6-3 hold in September; the next decision is on 5 November
Bank of England Governor Andrew Bailey said on Friday that higher energy prices have so far had only a limited knock-on effect on wider British prices, but that it is too early to form a firm view. That leaves the door open to a rate rise without signalling that one is imminent.
Speaking at the Institute of International Finance’s annual meeting in Bangkok, held alongside the IMF and World Bank annual meetings, Bailey said the evidence on so-called second-round effects has been quite subdued. These are effects where higher energy costs feed into wages and the prices of other goods and services. He added that businesses are emphasising cost-cutting, rather than passing costs on.
At the same time, Bailey described above-target UK inflation as enormously frustrating. He said the economy has proved more resilient than the Bank expected, but is not as strong as it needs to be, and that news from the Middle East is the biggest factor driving UK government bond yields.
The comments matter because markets have been betting heavily on a rate rise at the Bank’s next decision on 5 November. Bank Rate stands at 3.75%, and at the September meeting the Monetary Policy Committee voted 6-3 to hold, with three members preferring an immediate increase. Bailey voted with the majority. In late September, however, he warned that persistently high energy prices would make it harder to keep rates on hold, a shift in tone that helped push hike expectations higher.
Friday’s remarks are more balanced. Describing second-round effects as subdued is consistent with the Bank’s September assessment, and suggests Bailey is not yet convinced the energy shock is becoming embedded in wage and price setting. That is the key test for the MPC majority. His frustration over inflation, however, signals little tolerance for a prolonged overshoot, so the comments stop short of pushing back against a November move.
His point on gilt yields underlines how far UK rates now depend on oil and gas prices tied to the Iran war. A further rise in energy costs would strengthen the case for tightening, while an easing in Middle East tensions would weaken it.
The next markers are UK September inflation data next week, the 28 October Budget, and the Bank’s November decision, which will come with fresh forecasts.
This article was written by Eamonn Sheridan at investinglive.com.
