Deputy Bank of England chief hints rates may not rise as much as markets expect
Ben Broadbent told students at Imperial College London it remains to be seen whether base rates will rise to the level markets predict.
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Your support makes all the difference.The Bank of England’s deputy governor of monetary policy has questioned whether “dramatic” hikes in interest rates are necessary amid signs global prices are stabilising.
It remains to be seen whether base rates will rise to the level that markets predict, Ben Broadbent told students at Imperial College London.
In a speech, he said: “The Monetary Policy Committee (MPC) is likely to respond relatively promptly to news about fiscal policy.
“Whether official interest rates have to rise by quite as much as currently priced in financial markets remains to be seen.”
The justification for tighter policy is clear. It remains the case that most of the overshoot in headline Consumer Prices Index inflation, relative to target, reflects the direct impact of higher import prices
The MPC is due to determine the next interest rate rise when it meets in November, with some analysts expecting it to be hiked up from the current 2.25% rate to 3.25%.
But the remarks by Mr Broadbent, who is a member of the MPC, indicate there could be a smaller increase than the markets expect, which is likely to soothe the nerves of mortgage holders especially.
He also said if bank rates reach 5% – which markets have bet on in 2023 – it could hit gross domestic product by about 5%.
The economist made the point that soaring inflation has largely been driven up by higher import prices, particularly on gas and food, which will drop back down over time.
This has been caused by severe economic shocks such as the Covid-19 pandemic and Russia’s war on Ukraine.
“The justification for tighter policy is clear,” he told the university.
“It remains the case that most of the overshoot in headline Consumer Prices Index inflation, relative to target, reflects the direct impact of higher import prices.
“It also remains likely that much of this is likely to fade as those prices stabilise. This appears already to be happening in areas most affected by the pandemic.”
It’s understandable, faced with this extraordinary squeeze, that people and firms in the UK economy have sought to protect their real incomes – whether pay or profits – through compensating rises in wages and domestic prices. Unfortunately, and at least collectively, those efforts will not make us better off
Wholesale energy prices have soared by about 300% on average in the past six months but are likely to “fall significantly” in the next couple of years.
Furthermore, demand will slow as real incomes fall, which will also bring down the headline inflation level, he said.
However, the Government’s energy support package – which pledges to cap energy bills at £2,500 for the typical family – is expected to drive up consumer spending again which, in turn, could put pressure on monetary policy.
Mr Broadbent said: “However, by relieving some of the immediate pressure on household finances, the policy would also add significantly to domestic spending over the next year.
“At the margin, the task of reducing overall demand growth, in order to bring inflation back to target, would therefore tilt more towards monetary policy.”
Mr Broadbent acknowledged households are seeing a big squeeze in their finances this year, despite many people managing to build up savings during the pandemic.
But he said businesses deciding to raise staff wages and increase their prices will “unfortunately” not boost people’s wealth.
He added: “It’s understandable, faced with this extraordinary squeeze, that people and firms in the UK economy have sought to protect their real incomes – whether pay or profits – through compensating rises in wages and domestic prices.
“Unfortunately, and at least collectively, those efforts will not make us better off.”
Instead, it will raise inflation in the UK without having any impact on average real incomes, he warned.