A Reliable Rate Hike Is Back On The Table

#OPINIONLEADER#

ByJin Dao Tai

 NOV 25, 2021

Marching up the hill, the market is expecting a rate hike from the BoE

During the September’s monetary policy meeting, the Bank of England (BoE) hinted at the market that the tightening of monetary policy is coming soon. The central bank highlighted that the case for tightening monetary policy in order to achieve its inflation target sustainably in the medium term has strengthened. Also, all members of the central bank agreed that “any future initial tightening of monetary policy should be implemented by an increase in Bank Rate, even if that tightening became appropriate before the end of the existing UK government bond asset purchase programme”. This led to the market’s expectation that the start of interest rate hike will take place by the end of this year.

In the following month, BoE Governor Andrew Bailey further strengthened this case in his speech. The central bank’s Chief felt that although the recent spike in inflation is expected to be transitory, the rise in energy prices will cause the spike to last longer, thus increasing the risk of higher inflation expectations. And so, Bailey highlighted that the central bank will have to take action in the form of monetary policy in order to lower the risk.

The “unreliable boyfriend number two”

Despite marching the market up the hill, the BoE decided to keep interest rate unchanged at an all-time low of 0.10% during its November’s meeting, sending a tone of disappointment across the market. Two out of nine committee members voted for a rate hike while the remaining seven voted for no change. Although the votes indicated a shift towards a more hawkish tone, the British pound was not spared from the market’s disappointment, weakening across the board. At the same time, Governor Bailey was labelled “unreliable boyfriend number two”, a nickname given to his predecessor Mark Carney for his poor communication with the market on monetary policy.

Governor Bailey explained during the press conference that the BoE is “in a situation where the calls are close”, indicating that the decision to hike interest rate is equally likely as the decision to not hike. In terms of inflation, Bailey said that the warning signs of prices surging further are present and that the central bank will need to keep a close eye on it. What held the BoE back from a rate hike this time round is the lack of clear evidence on the state of the UK’s labour market after the country’s furlough scheme ended on 30 September.

Positive economic data releases from the ONS put rate hike back on the table

Nonetheless, the UK Office for National Statistics (ONS) has just eased the BoE’s worry. Earlier this month, the ONS reported that 247,000 jobs were added into the economy in the latest 3-month period while more importantly, 160,000 jobs were added in October alone despite the end of the Coronavirus Job Retention Scheme. The ONS also highlighted that only a small number of jobs were lost due to the ending of the scheme. Hence, at the moment, the UK labour market is more resilient than initially expected.

Apart from the positive jobs report, the ONS also reported a 10-year high annual headline inflation level of 4.2% for the month of October, surpassing the expectation of 3.9%. With the UK labour market adapting well to the absence of the furlough scheme and together with the ongoing rise in inflation, it is very likely that the BoE will be considering a rate hike during their next meeting in December.