Bank of England Big-hitters Point to Further Rate Hikes, British Pound Holds Recovery Gains

Above: Pill addresses the TSC on February 09. Image and copyright: Pound Sterling Live, Parliament.tv

The British Pound held onto a recent recovery as some of the 'big-hitters' Bank of England's Monetary Policy Committee (MPC) steered markets towards another rate hike in March as they warned risks to UK inflation were pointed higher.

The Bank's Chief Economist Huw Pill, policymaker Jonathan Haskel and Governor Andrew Bailey appeared before Parliament's Treasury Select Committee (TSC) to give evidence relating to last week's Monetary Policy Report.

The Pound fell following the report as markets sensed the Bank was preparing to exit its rate-hiking cycle amidst expectations for inflation to fall over the coming months.

Indeed, Bailey said, "we expect inflation to come down rapidly this year... base effects will put powerful negative trajectory on UK inflation this year."

But he added, "we have a very tight labour market... we are concerned about inflation persistence, this is why I've voted to raise rates."

Bailey said he believes inflation has just turned a corner, however, there is substantial uncertainty and he wants to see more evidence that "we have really turned a corner" on inflation and that inflation is sustained at acceptable levels.

The TSC says much of the hearing would focus on whether the Bank was too late in addressing building inflationary pressures.

"The purpose of the hearing Given the Bank forecast in February 2021 that inflation would not rise beyond its two per cent target, and that it continued to describe the situation as “transitory” until February 2022, the Committee is likely to explore whether the Bank was – and remains – behind the curve," said a statement from the TSC ahead of the hearing.

The Pound fell after money market pricing for the peak in Bank Rate retreated following last week's MPR; should these expectations stabilise, or even go higher, the Pound could find support.

Pill said "there is no room for complacency" on inflation and that the "MPC continues to be watchful for signs of greater persistence in inflationary pressures."

However, Pill signalled the end to the hiking cycle was nevertheless likely close at hand as he is seeing some signs of loosening in the labour market data.

"I would expect some margin of economic slack to emerge that serves to contain inflationary pressures," he said. "There is substantial further monetary policy tightening still to come through as a result of lags in policy transmission."

Pill also said he anticipates an extended period of weakness in the UK economic activity. Nevertheless, he added that the Bank must be prepared to see through policy tightening to address potential upside risks to inflation.

"There is a danger of over-steering on rates, given lags in transmission," he said. "But we do need to be alert to inflation persistence, look at price- and wage-setting."

But it was Haskel who served up the more hawkish testimony, hinting he believed another 50bp rate hike could be in order for March.

He said in a written submission to the Committee:

"Economic theory suggests that uncertainty around the persistence of inflation should be met with more forceful action, and so I shall remain alert to indications that inflation is more persistent than we expected, and act forcefully if necessary."

The Bank dropped the term "forceful" from its statement in February, a term that has been associated with moves of 50bp or more, suggesting the MPC was leaning towards a 25bp move, or even stopping.

But Haskell's use of the term suggests he is more inclined towards another sizeable hike at this juncture.

This could keep rate hike expectations elevated, which in turn supports UK bond yields and the Pound.

GBP/EUR has now extended a recent recovery to 1.1280, GBP/USD has risen back to 1.2147.