Bank of England says December Rate Hike "In Play"

Above: Governor Andrew Bailey. Image copyright Pound Sterling Live, courtesy of Parliament.tv

Governor of the Bank of England Andrew Bailey said it remains vital that the Bank emphasises the significance of inflation in its policy decisions and all meetings are in-play for a rate hike.

The message keeps alive prospects of a December rate rise at the earliest and a February rise at the latest.

The Pound fell in the wake of the November decision to keep interest rates unchanged and markets rapidly drew down expectations for a December hike, but these words from the Governor will keep the UK currency bid.

"I am very concerned about the country's inflationary scenario," Bailey told the House of Commons' Treasury Select Committee.

Bailey appeared before UK lawmakers alongside the Bank's Chief Economist Huw Pill and fellow Monetary Policy Committee members Dr. Catherine Mann and Michael Saunders.

Regarding the Bank's decision not to raise rates, Bailey said the decision was "a very tight call".

Bailey noted however there were now a lot more "two-sided hazards" and economic growth had begun flattening out.

But, the labour market appears to be heading in a direction consistent with higher interest rates.

Bailey said the market looks "tight" i.e. there are less employees chasing more jobs, as evidenced by data from the ONS showing there are now in excess of 1.2M outstanding job vacancies.

The Bank has maintained it did not want to raise rates until it knew the impact on the labour market of the ending of the Government's jobs support scheme, put in place to help employers keep employees during the Covid pandemic.

Bailey told the Committee that anecdotes suggest that the transition out of the furlough scheme has not increased unemployment, an observation that comes just hours ahead of November's labour market report which would be the first to contain data covering the post-furlough period.

As such, Bailey believes the MPC will begin to see "the picture" at the next policy meeting.

"The big question for me is that I believe the labour market is becoming significantly tighter," said Bailey.

Above: MPC Member Michael Saunders. Image copyright Pound Sterling Live, courtesy of Parliament.tv

The Governor said salary settlements are becoming more dispersed but companies are having to pay up to recruit. "The recruitment and employment survey on labor shows premium paid for jobs."

Mann said for her the question now is whether firms will raise prices in order to raise wages.

"I see probable weakening in firm pricing power, which dampens inflation prospects," said Mann who is considered more of a 'dove' on the MPC in that she is not easily inclined to vote for rate hikes. "I see a chance of a dampener on inflation prospects".

Indeed, her colleague Saunders stated there is no danger of a wage-price spiral.

But Saunders, who voted to hike in November, thinks the risk of a general increase in inflation is substantial enough to justify hiking rates now.

"Inflation will overshoot if policy is not tightened," he said, but added inflation will not return to the same level as the 1970s.

"The risk of postponing hiking rates for too long is that they will have to go up a little faster and further," said Saunders, who saw rising service sector inflation as particularly troubling.