The Bank of England (BOE) held off on making changes to monetary policy last week, but sent its strongest signal yet that rates could rise in the next few months.
Pound sterling immediately surged to a fresh fifteen-month high of $1.36 U.S. after the BOE’s leading dove backed policy tightening. Gertjan Vlieghe, a hedge fund economist who joined the central bank’s Monetary Policy Committee in 2015, said “the amount of economic slack continues to be eroded.:
In his view, “We are approaching the moment when Bank Rate may need to rise and this may be as early as the coming months.”
In market speak, a “dove” is someone who backs ultra-easy monetary policy, such as low interest rates and fiscal stimulus, in support of economic growth and employment. They contrast with central bank hawks, who believe efforts to control inflation should take precedence and that monetary policy should be tightened.
UK inflation is running hotter following the BOE’s decision last year to slash interest rates to new lows. The consumer price index (CPI) rose at an annualized 2.9% in August, matching May’s multiyear high. At the time of cutting interest rates, the BOE said it was willing to risk overshooting the inflation target to support economic growth in the wake of the Brexit vote.
Like other central banks, the BOE targets inflation at 2% annually. Faced with Brexit risks, policymakers in August 2016 voted to cut interest rates to a new low of 0.25% and raise the asset purchase facility to £435 billion. That marked the BOE’s first rate cut since the financial crisis.
Britain’s central bank has been divided on the path of normalization for quite some time. Earlier this year, three members of the MPC voted in favour of raising interest rates. That number has fallen back down to two in the last few policy meetings. However, based on Vlieghe’s recent comments, a rate hike is likely warranted this year.
The Treasury Committee is scheduled to hold Inflation Report Hearings on Tuesday. The Hearings examine expenditure, administration and policy related to the inflation.
Ambrose Evans-Pritchard (15 September 2017). “Pound surge on Bank of England shift is a mixed blessing.” The Telegraph.