The World In A Week – Circus Act

Written by Shane Balkham.

Inflation is the lion that every central banker is trying to tame and ahead of the UK’s inflation figures that will be published on Wednesday, the Bank of England readied its whip.  Speaking to the G30 group of central bankers last night, the governor of the Bank of England’s rhetoric was aimed at preparing market expectations.

The forward guidance from Andrew Bailey confirmed that the Bank would need to act in order to curb the current inflationary pressures and that might mean an interest rate rise sooner than the general expectations of early in 2022.  The role of policymakers during this crisis has been to ensure that nothing was off the table in terms of magnitude and type of action.

In a similar speech at the end of last month, the governor also looked to ensure that the Central Bank was seen as using all the tools at its disposal.  Being a policymaker is a subtle game of managing expectations in such a way as not to surprise the markets.  In the next fortnight we have the publication of the UK’s inflation rate and the UK’s budget, both  are potentially flammable for the policymakers at the Monetary Policy Committee.

The key is to ensure that a strong enough signal has been sent out and understood by the market, and that signal is saying an interest rate raise of 0.15% is not off the table for this year, in order to bring UK interest rates up to 0.25%.

It is unlikely that this decision will be made at the next month’s meeting, as previous minutes have shown that the committee want to see the full effect of the furlough scheme ending before any action is taken.  This leaves the December meeting as the earliest most likely meeting if the committee decide to act this year.

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