The interest rate debate

Is the Bank of England’s apparent volte-face on inflation justified?

Clouds over the City: is there trouble ahead?
Clouds over the City: is there trouble ahead?
(Image credit: Dan Kitwood/Getty Images)

Economists at Bank of America are not doing much “to crank up the Christmas cheer”, said Alistair Osborne in The Times. Having noted the “more hawkish tone over inflation” coming out of the Bank of England (BoE), they’re forecasting a hike to 0.25% in December (from 0.1% now) followed by a further quarter-point rise next February. The City’s bond traders are on the same page. Yields on UK government bonds (gilts) – which tend to mirror interest rate expectations – climbed to “a two-and-a-half-year high” of 1.19% this week. Even if BoE governor Andrew Bailey wants to hold fire, he “may struggle to resist the markets’ push for movin’ on up”.

Alternatively, said Bloomberg, it may mean currency traders think “the Bank of England is about to make a mistake” – that overzealous efforts to curb inflation will “darken the outlook for growth and consumer sentiment”. Certainly, “the gnashing of teeth about imminent stagflation looks wildly misplaced”. UK growth this year is likely to be above 6% – leading the G7 – and inflation is lower than in the US. The panic looks irrational. “The BoE has been in stimulus mode for too long without having its faith challenged.” But now it seems to have lost its faith “that inflation is purely transitory”. Hiking interest rates isn’t going to lower gas prices, train more truck drivers or produce more microchips. Why respond to “overseas cost-push inflation” with “a blunt demand-side hammer”? The US Fed and the European Central Bank are in “no hurry to rein back stimulus”. Britain looks to be going it alone. Given that the world’s central banks “are, in effect, umbilically linked”, that is “an invidious place for the BoE to find itself”.

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