U.K.’s Miles Says Investors Wrong to Ignore Risk of 3% BOE Rate
Investors are making a mistake by thinking that U.K. interest rates will not rise as high as 3% if the current surge in inflation proves persistent, according to the incoming head of macroeconomic analysis for the country’s budget watchdog.
Speaking to lawmakers on the Treasury Select Committee, David Miles, a former Bank of England rate-setter, said he was seeing evidence of generalized inflation gathering in the U.K. through higher wages.
The former Morgan Stanley economist spoke after data showed inflation in November exceeded 5% months before the BOE had forecast. The figure will add pressure on the central bank to act, but economists expect policy makers on Thursday to keep interest rates at 0.1% as they weigh the risks from the omicron variant of the coronavirus.
Asked about a scenario published alongside the October budget in which interest rates get to 3.5%, Miles said: “If we had persistent inflation that doesn’t fall away after spring, then we could see really quite significant rises in interest rates.”
“I don’t think it’s out of the question that we get much higher interest rates than the financial markets are expecting.”
Investors currently expect the benchmark rate to reach 1% next year, a trajectory that even some BOE officials have described as too steep.
“They are not attaching any weight really to rates at 2% let alone 3%,” Miles said of market bets. “Some in financial markets will say that’s just not going to happen. I think they have misplaced confidence about that.”
Inflation is now expected to peak at around 6% in April, treble the BOE’s target, and Miles said there is a clear risk that it will get into wages. Public and private sector pay settlements in the coming months will prove pivotal, as those costs may be pushed through to higher prices.
“Wage settlements come in the early part of the year and they will be negotiated in an environment of 5%-6% inflation. It is perfectly plausible that settlements will be significantly higher than recent years,” Miles said.
“It is a real possibility that we get second round inflation pressures that started out as energy and global become a bit more domestic and less transient.”
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