Governor of the Bank of England Andrew Bailey
(Picture: PA Wire)Who’d be a rate setter in this economy?
Data out today underlines the almost impossible decision facing the Monetary Policy Committee next week. Members must decide what they are worried about more: growth or inflation? Both are in bad shape.
Britain’s Covid recovery has hit the buffers and is at risk of going into reverse as Omicron restrictions bite and cloud the outlook. That would usually prompt the Bank to keep rates low to stimulate the economy with cheap cash.
But at the same time, prices are spiralling. Deputy government Ben Broadbent said this week that inflation would be “comfortably” above 5% by next Spring. That would usually prompt higher rates to take some of the fuel out of and cool price rises.
Threadneedle Street has looked past inflation up to now by arguing that price rises are being driven by “transitory” factors that will fade. That position is getting harder to justify. In the last month, the US Fed and the Bank of Canada have both stopped using language that suggests price rises are temporary. Central bankers think the problem could be more persistent.
Weak growth and soaring inflation don’t usually go together. The toxic combination leaves the Bank of England in ‘pick your poison’ territory. At the moment, investors expect rate setters to leave rates at their record low levels yet again next week, but the decision is finely balanced and not everyone is convinced. Deutsche Bank see a hike to 0.25%.
For governor Andrew Bailey and co., next week will be a case of stick or twist. Both options will leave someone unhappy.
