BOE governor Bailey Q&A: Not cutting rates afforded space to deal with inflation pressures
- There is a good deal of space available to accommodate inflation pressures by not cutting interest rates as had been previously expected
- The necessary response by not cutting interest rates as was expected has largely achieved what is necessary under Scenarios A and B, without the need for further rate increases
- The sheer volatility of energy prices makes it impossible to attach any probabilities on the different scenarios
- It would be a mistake to wait for second-round effects before acting; that will be too late
- Energy price profile of Scenario B is more plausible than Scenario A
- The decision to hold interest rates today is not a passive one, it is an active hold
He’s mainly referring to the scenario analysis depicted earlier here. On the headline remark, it is a valid point as the switch of expectations from rate cuts to rate hikes in itself a tightening in financial conditions. But therein lies the danger of the switch, it is that now any walking back of rate hikes will translate to loosening of financial conditions. And if the BOE is not careful, they risk inflation spiraling out of control amid potential second-round effects.
This is part of the problem that all major central banks are facing as highlighted earlier this week here.
This article was written by Justin Low at investinglive.com.