Andrew Bailey may not be able to wear the armor of a past Threadneedle Street white knight, but that is the role he was given in 2020.
The Governor of the Bank of England has been thrown right into the grip of the pandemic, bailing out the economy, cutting interest rates and pumping out money — in the form of quantitative easing (QE) — at an unprecedented rate.
In doing so, he followed the model of his predecessors Lord King and Mark Carney, who sought to protect the economy from the crises and crises of the past 15 years. , usually by keeping the cost of borrowing as low as possible.
Now the economy is facing the opposite problem, and as the Bank needs to quell runaway inflation, the Governor looks oddly helpless.
Bailey has repeatedly raised the cost of borrowing, raising the base rate from 0.1% in December 2021 to 4.5% today, in an increasingly desperate attempt to keep prices low.
Despite this, inflation has only recently dropped below 10%.
It fell to 8.7% in April, more than four times the Bank's target of 2% and well above the average worker's wage growth rate. The Monetary Policy Committee (MPC), which Bailey chairs, is due to raise rates again at its meeting on Thursday.
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But the committee's ability to bring prices back under control is increasingly in doubt. Our hero's credibility plummets, causing political horror and fueling unrest in the markets.
Every time the Bank raises interest rates and says it hopes it will do enough to bring down inflation soon, new economic data comes out showing the economy has other ideas.
Markets are panicking at the thought that further rate hikes will be required, which will raise the cost of borrowing for the government and mortgage holders, squeeze the economy, and increase pressure on the Bank to play catch-up.
Last iteration This pattern appeared on last week, when unexpectedly strong labor market data showed private sector wages skyrocketing. This prompted Bailey to admit that it takes «much longer» to bring down inflation than he had hoped.
Interest rates on government bonds have risen, and several banks have raised mortgage rates or reduced the number of loans they offer.
Traders now expect the BoE's base rate to reach 5.75% next year with the risk that it could hit 6%, a level that hasn't been seen in over 20 years.
Elderly City The bosses are dismayed by the bank's inability to deal with the riots. One of the leading figures wants the governor to raise rates by 0.5 percentage points this week to get ahead of market sentiment and prove that the MPC is in control.
Few economists expect politicians to be so bold.
Andrew Goodwin of Oxford Economics says «the magnitude of the recent market reaction suggests a lack of confidence in the Bank of England's ability to bring inflation under control» and forecast inflation to rise to 4.75% this week.
«We think the MPC will want to prove its ability to fight inflation and raise the rate again in August, raising the bank rate to 5%,» he adds.
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There is good reason for some caution.
Ellie Henderson, an economist at Investec, expects a majority of the nine MPC members to vote for a 0.25 percentage point hike, with only a few hawkish politicians choosing a bigger move to curb inflation.
«We believe that the UK economy will enter a recession at the end of the year,» she says.
“It will help bring inflation down again, but the question is how long it will take to bring inflation back to the 2% target and how difficult it will be for the Bank of England to tighten the screws to help that path.”
Hugh Pill, the Bank's chief economist, said it was important to strike a «balance between ensuring that inflation returns to its target and containing the costs that the measures needed to ensure a return fall on already vulnerable households and businesses.»
Swati Dhingra, a relatively peace-loving member of the MPC, said last week that the higher cost of money «is already beginning to increase the ongoing pressure on families who rent or negotiate in the mortgage market.»
Deciphering the impact of past rate hikes on the economy is crucial.
Policymakers typically estimate that it takes 18 to 24 months for rate hikes to fully affect the economy as a whole, as higher borrowing costs gradually limit the purchasing power of households and businesses and thus smooth out inflation .
It has only been 18 months since the Bank ended quantitative easing in the era of the pandemic and changed monetary policy, so much of the impact on inflation has yet to be felt.
Meanwhile, the current rate hike is not expected to have a full impact on inflation until late 2024 or early 2025. Even this usual rule of thumb can become obsolete.
On the eve of the financial crisis, when rates were last at this level, about half of mortgages were at fixed rates. This meant that half of those with mortgages immediately felt the effect of higher borrowing costs.
Now only about 15 percent have floating rates, so the vast majority of mortgage borrowers are protected for some time from additional costs. This complicates Bailey's job.
There is a greater risk that the Bank will raise rates, see little effect, and thus raise them again only to find that the cumulative effect comes much later and more strongly than expected.< /p> 1606 Bank interest continues to suffer
It's a dilemma for policymakers facing serious pressure from the markets and policy makers reacting to new data each week, including May's inflation data due on Wednesday and expected to rise above 8%. .
Jagjit Chadha, director of the National Institute of Economic and Social Research, says the Bank has already done enough to bring inflation under control by early 2025 and would not have to go any further if it could present that argument convincingly to the markets.
«We may have to raise interest rates higher than otherwise because we were not clear enough and then we would have to stop the recession,» he says.
Sven Jari Sten of Goldman Sachs does not expect the Bank to show such confidence this week.
“We expect the pattern to continue with MPC remaining evasive of further tightening but then rising to more than 0.25%. point increase thanks to stronger-than-expected data,” he says.
There is certainly room for more surprises in the data, especially given the extraordinary resilience of the labor market.
Megan Green, who will join the MPC after this week's meeting, told MPs last week that it was critical to eradicate inflation completely.
“You can't let inflationary expectations come off the anchor or you'll end up in this situation. This is the most important thing to take away from the 1970s and 1980s,” she said.
It could raise the risk of a recession, but that’s the Bank’s balance sheet.
“There are always there is a risk of being overdrawn. The calculation every central bank must make is to figure out if this is the biggest risk compared to not tightening further,” Greene said.
Paul Dales of Capital Economics argues that The bank is right to focus on curbing inflation. even if it leads to a recession, which he thinks it will.
«We effectively navigated the cost-of-living crisis without a recession, which was quite remarkable,» adds Dale.
» But I don't think we can get through the credit crunch without a recession. Dodging one is pretty good, but dodging two is something of a miracle.”
Perhaps this is a battle the governor simply cannot win, with or without armor.
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