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Wednesday February 21, 2024

BoE wants more evidence that inflation risks are waning

By News Desk
February 10, 2024

LONDON: Bank of England policymaker Jonathan Haskel, who voted to raise interest rates last week, said he is encouraged by signs that Britain's inflation pressures might be on the wane but he would need more evidence of a cool-down before changing his stance.

This image shows the Bank of England. — AFP/File
This image shows the Bank of England. — AFP/File

Haskel was one of two rate-setters who backed raising Bank Rate from 5.25 percent - its highest in almost 16 years - to 5.5 percent. Six of the nine-strong Monetary Policy Committee (MPC) opted to keep rates on hold, saying their two-year campaign of higher borrowing costs was having an impact. One MPC member, Swati Dhingra, voted for a rate cut.

But the votes by both Haskel and Catherine Mann for another increase - which they attributed to persistent inflation pressures - took some investors by surprise. "I'm not going to apologise for banging on about persistence because I think we're right to," Haskel told Reuters.

Mann said on Thursday her decision to vote for higher rates had not been easy. Haskel said a recent fall in Britain's headline rate of inflation to 4% in December - down from a 41-year of 11.1 percent in October 2022 - was welcome. But that did not tell the full story of what was likely to happen in the coming months.

Underlying measures of price growth - such as a gauge of inflation in Britain's services sector with the most volatile elements stripped out - had recently stopped falling and held steady at a still high annual rate of about 6.5 percent, Haskel said.

"The signs that we've seen thus far are encouraging. I don't think we've seen quite enough signs yet," Haskel said in an interview on Thursday. "But if we accumulate more evidence on persistence, then by the very logic I've just set out, I'd be happy to change my vote." While most of the MPC are looking for sufficient evidence to justify a rate cut, Haskel is studying the same data for signs that it is no longer necessary for rates to rise further.

He said his decision last week had been "finely balanced" but he wanted "to wait a bit longer to accumulate more evidence on that persistence."

The BoE was the first major central bank to start raising interest rates in late 2021 but it was criticised for not moving fast enough as energy prices sky-rocketed after Russia's invasion of Ukraine in February 2022.

Inflation in Britain fell sharply in recent months and is no longer an outlier among the world's big rich economies. The BoE now expects headline inflation to hit its 2 percent target around April or May, about 18 months earlier than it previously thought after gas prices tumbled, before rising towards 3% at the end of 2024 as the impact of falling energy prices fades. Investors largely expect a first rate cut by the BoE in June with probably two more quarter-point cuts by the end of 2024.

MOVE GRADUALLY

Haskel said he had a "preference for gradualism" on monetary policy - outside crisis periods - and he thought Britain needed high borrowing costs given inflation risks in the economy, suggesting a high bar for him to vote soon for lower rates.

The BoE's job of gauging the inflation heat in the economy has been complicated by problems that Britain's official statisticians have had with estimating unemployment. Haskel said another challenge was the breakdown in the previously reliable relationship between data from Britain's Recruitment and Employment Confederation and less timely official wage growth figures.

Furthermore, researchers working for Haskel believe the official data on pay excluding bonuses - which has fallen by more than the BoE expected - might have been distorted by past one-off cost-of-living payments that employers did not class as bonuses.

The slower growth in regular pay now might reflect the end of these bonuses, rather than cooler underlying pay pressure. Haskel said he was unable to say how long it would take to be sure that inflation pressures were falling sustainably, and did not put much weight on a sharp decline in wage inflation when looked at on a quarterly rather than an annual basis.

"I can't really say how many months I want to see. But again, it's the stress on trying to look at these underlying indicators," he said.

Haskel, an economics professor at London's Imperial College, has served as an external member of the MPC since 2018 and his second three-year term is due to expire at the end of August.

Asked whether he thought Britain's economy was more inflation-prone than when he joined the BoE, Haskel said price growth had been around the central bank's 2% target when he arrived and it was forecast to be about 2 percent when he leaves.

"I think that's my cute answer," he said, before adding he was worried that Britain might have to tolerate higher unemployment than in the recent past to keep inflation at 2 percent.

"I guess the second thing is ... it's been a turbulent six years and a lot of ups and downs and Brexit, (the pandemic), Liz Truss and all that kind of thing. I've got to say the economy, in some ways, has been amazingly resilient," he said.

"Relative to that magnitude of shocks, we've navigated our way through all of this." Meanhwile, Franklin Templeton's head of sustainability and European fixed income David Zahn said on Friday th Bank of England will probably need to cut rates sooner than other big central banks, meaning a favourable outlook for UK governments bonds,

"We have been more constructive on the UK, we think they (Bank of England) probably do need to cut rates sooner than the others," Zahn told Reuters, referring to other major central banks.

"The UK economy is doing worse so we actually have an overweight to UK fixed income in our European accounts, which is unusual - we don't normally do that."

Zahn manages roughly six billion euros ($6.46 billion) worth of assets at the $1.5 trillion asset manager. Six of nine BoE rates setters opted to keep rates on hold last week, saying their two-year campaign of higher borrowing costs was having an impact, while one voted for a rate cut.