Bank of England Governors Face MPs Ahead of Interest Rate Decision

Strategic Insights -

Bank of England governor Andrew Bailey and three other monetary policy committee members faced the Treasury select committee yesterday, ahead of next week's decision on interest rates. The gathering comes as the UK prepares for a new prime minister, Liz Truss, who has promised radical solutions to the country's energy crisis. Despite the promise of change, Bailey and his colleagues remain committed to bringing inflation back to the target of 2 per cent. A 15-month recession is forecasted, with the Bank of England attributing it to the war in Ukraine and its impact on real incomes and demands.

Key Takeaways:

  • The Bank of England has forecasted a 15-month recession, starting from the end of this year, with the main cause being the war in Ukraine and its effect on real incomes and demands.
  • Despite the new prime minister's promise of radical solutions, Bailey and his committee members believe a recession is unavoidable, with Putin being the primary cause.
  • The government's plan to cap energy bills for households and businesses may help shorten a potential recession by propping up consumers' disposable income, but also raises the prospect of more aggressive interest rate rises.
  • Money markets predict an interest rate rise of 75 basis points from the Bank of England at its MPC meeting next week, the largest rate rise since 1997.
  • The MPC committee members are committed to bringing inflation back to the target of 2 per cent, but there were clear splits among them, with some favoring a more gradual pace of tightening.
  • The Bank's chief economist, Huw Pill, insisted that debates about the price cap should not sway the committee from its inflation-fighting stance.
  • The Bank's plan to approve the start of gilt sales to shrink its balance sheet, quantitative tightening, will begin this month, but its start date remains uncertain.
  • Bailey dismissed two radical proposals to overhaul the Bank of England's mandate, including targeting the money supply and adopting a nominal GDP target as the best way to control inflation.

Statistics:

  • The Bank of England has forecasted a 15-month recession, starting from the end of this year.
  • Money markets predict an interest rate rise of 75 basis points from the Bank of England at its MPC meeting next week.
  • The largest rate rise since 1997 would be 75 basis points.
  • The Bank of England's quantitative tightening program will begin this month with a pace of £10 billion per quarter.
  • Ten-year gilts have risen to their highest level in almost a decade.
  • Longer-dated 30-year gilts have suffered their worst sell-off in more than two years.

Sources:

  • The Times (exact article not provided)
  • Andrew Bailey, Governor of the Bank of England
  • Huw Pill, Chief Economist of the Bank of England
  • Silvana Tenreyo, Monetary Policy Committee member
  • Catherine Mann, Monetary Policy Committee member
  • Harriett Baldwin, former junior Treasury minister
  • David Aaronovitch, columnist