Persistent Inflation May Call for Further Interest Rate Hikes
On Thursday, Jonathan Haskel, a member of the Bank of England's Monetary Policy Committee (MPC), addressed the growing concern of unyielding inflation. Haskel, known for endorsing larger interest rate hikes than most on the MPC, emphasized that the Bank of England must actively combat the risk of persistently high inflation. This might necessitate more interest rate increases.
Inflation Drop Less Than Anticipated; Investors Adjust Expectations
The remarks came a day after data revealed that inflation dropped to 8.7% from 10.1%, a less significant decrease than the market had predicted. This caused a drop in British government bond prices as investors recalibrated their expectations for more interest rate hikes from the Bank of England, previously thought to be nearing the end of its rate-raising cycle.
Bank Rate Increases Are on the Table, Says Haskel
Speaking at the Peterson Institute for International Economics in Washington, Haskel affirmed the possibility of more increases in the Bank Rate. Haskel noted his preference to counteract the risk of inflation momentum, highlighting that the current difficulties are preferable to allowing inflation to become firmly established.
The Impact of BoE's 12 Interest Rate Hikes Since 2021
The Bank of England has hiked rates 12 times since December 2021, pushing interest rates to 4.5% earlier this month. With markets predicting rates to rise to 5.5% by November, the BoE's commitment to managing inflation is clear.
Economic Growth and Inflation: Haskel's Perspective
Despite certain indicators suggesting otherwise, Haskel continued to see the UK's labor market as extremely tight. He stated that the economy's ability to expand without generating excessive inflation has weakened. He dismissed the notion that inflation was primarily due to firms increasing prices.
Haskel on the April Surge in Core Inflation and Second-hand Car Prices
Haskel hoped that the unexpected rise in core inflation in April – a metric closely observed by the BoE that excludes volatile food and energy prices – would be a temporary anomaly. He pointed out that the spike in core goods prices was partly due to a resurgence in second-hand car costs, which had surged during the COVID-19 pandemic but were expected to drop as supply constraints for new models eased.
The Future of BoE Interest Rates Amid Persistent Inflation
Haskel declined to comment when questioned about market expectations for BoE interest rates after his speech. However, he reiterated that the policy would be tightened accordingly if inflation continues to show stubborn persistence.