Bank of England Officials Add to Questions on December Rate Rise

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The Bank of England’s top two officials raised questions about the certainty of an interest-rate increase in December, noting the decision would be finely balanced.

Governor Andrew Bailey told the Sunday Times that risks to the U.K. economy are “two-sided” at the moment, with slowing growth and rising inflation. That echoed comments made Friday by Chief Economist Huw Pill.

Bailey also emphasized that the BOE will have to act if “second-round effects, particularly in wage bargaining and the labor market” start seeping though into higher prices. After a week in which inflation hit the highest in a decade and an official report indicated the labor market is tightening, neither Bailey nor Pill indicated that is a cause for concern yet.

While Bailey said his remarks were consistent with what he said in October, the tone was more careful than his comments in the lead-up to the BOE’s meeting earlier this month. Investors moved quickly to price in the first rise in borrowing costs since the pandemic after Bailey said at a Group of 30 event that the BOE will “have to act” to curb inflationary forces.

Policy-makers wrong-footed investors on Nov. 4 by leaving rates unchanged. Since then, Bailey has sought to emphasize the conditions he attached to his comment about the likelihood that policy will tighten soon, and Pill added to that effort on Friday. 

Together, the comments raise doubts whether the BOE will raise rates at the next meeting on Dec. 16, something financial markets have priced in as a near certainty.

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What happens in February is also in focus. The big question is whether the Monetary Policy Committee raises borrowing costs to 0.5% by then -- the threshold after which policy makers may let gilts that mature in its 875 billion-pound ($1.2 trillion) asset-purchase program roll out of the portfolio without being replaced.

On Friday, money markets were betting the key rate will be about nine basis points short of hitting that level. 

Bailey and Pill highlighted issues that may give policy makers reasons to pause before moving, namely that the pace of recovery has slowed and that the cause of inflation -- higher energy prices due to a supply squeeze -- won’t be cured by higher rates. 

Also, it may take time to assess whether expectations about future inflation are rising in an alarming way or if that kind of thinking is starting to seep into the wages sought by workers.

“Let’s be clear -- if we see inflation expatiations that’s increasing, we’ll have to act,” Bailey told the Sunday Times. “There’s no question. But to be clear, at no point did I or anybody say, ‘And by the way, we’re going to raise interest rates in November.”’

Read more: Bank of England’s Huw Pill Casts Doubt on December Rate Rise (1)

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