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All MPC members ready to raise UK rates this year if needed, says Bailey

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The governor of the Bank of England said on Monday that every member of its monetary policy committee was ready to raise interest rates before Christmas if needed to prevent higher inflation becoming persistent.

In a speech to the Society of Professional Economists in London, Andrew Bailey made no attempt to contradict financial market expectations that the BoE was preparing a first interest rate rise in February — earlier than previously expected — as he doubled down on the hawkish tone of the MPC’s minutes last week.

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The speech is likely to clarify for economists that the market interpretation of the BoE’s thinking is correct and the MPC is looking to begin normalising super-cheap borrowing rates early in 2022 or even before.

Some of the uncertainty regarding the strength of the labour market after the furlough scheme ends this week would be resolved “in fairly short order”, Bailey said, explaining why a majority on the MPC thought no action was needed at the September meeting.

He made it clear that a rate rise could happen very soon if the committee felt higher inflation was becoming embedded in companies’ pricing plans and general wage demands.

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Speaking about the group on the MPC who were most reluctant to tighten monetary policy and raise interest rates, the governor said: “All of this group were of the view that the stimulus to monetary policy enacted in response to Covid would need to start to unwind at some point, that unwind should be enacted by an increase in bank rate, and if appropriate would not need to wait for the end of the current asset purchase programme [in December 2021].”

Bailey described the current state of the recovery as the “hard yards”, when the easy gains from removing restrictions had been achieved, raising the output of the economy from 25 per cent below the pre-pandemic level to 3.5 per cent below in July.

These closing stages of the recovery also entailed supply shortages related to Covid-19 and an element of economic restructuring where there was more demand for some jobs and less for others than before the pandemic. He pledged the MPC would not try to stop this restructuring with monetary policy.

Making it clear that the committee would not raise interest rates just because there were shortages of HGV drivers and this drove up wages in the sector or because electricity prices were rising, Bailey said: “Monetary policy should not respond to supply shocks which do not become generalised through their impact on inflation expectations.”

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But the governor said the committee was watching the labour market closely for signs that excess demand was more permanent and that higher inflation would be more persistent than the BoE currently believes.

The surge of vacancies to a record level was consistent with a persistent and widespread rise in wages that suggested excess spending — something the BoE would need to take seriously, he said.

But, Bailey noted that the rise in vacancies was also possibly a sign that companies had become too optimistic about general spending in the economy and these vacancies would not turn out to be real. In addition, there might be a bulge in vacancies now as companies sought to hire staff before they were really scarce so unemployment and vacancies would both fall next year.

“The implications of these labour market outcomes are quite different for growth, inflation, and thus monetary policy, which illustrates the uncertainty we face,” Bailey said.

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