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BoE’s Taylor says prolonged energy shock could cement case for hikes

Bank of England (BoE) Monetary Policy Committee member Alan Taylor said on Tuesday that “monetary policy should not react mechanically to movements in energy prices,” though he recognized that if “pressure builds and second round effects” emerge, then the BoE should reassess monetary policy.

At the last BoE meeting, Taylor voted to hold rates unchanged, as the majority kept rates at 3.75%. Taylor added that a case for rate increases would be cemented if “energy prices remain high for an extended period.”

Key highlights:

The right policy response is vigilant but disciplined.

Monetary policy should not react mechanically to movements in energy prices if those movements remain primarily relative-price shocks.

If pressure builds and second-round effects begin to gain traction, the policy assessment would have to change.

At some point, once energy risks abate, policy will need to move in the other direction.

The burden of proof for additional tightening should rest on evidence that second-round effects are actually gaining traction.

The case for further rate increases is not compelling to me unless energy prices remain high for an extended period and also generate clearer signals of a transmission into broader inflation persistence.

The economy is proving less susceptible, at least so far, to a repeat of the inflation dynamics seen in 2022.

There is a non-trivial risk to inflation.

Evidence points against a general inflation shock.

The current policy stance is restrictive enough.

Pound Sterling Price This Month

The table below shows the percentage change of British Pound (GBP) against listed major currencies this month. British Pound was the strongest against the New Zealand Dollar.

USDEURGBPJPYCADAUDNZDCHF
USD2.51%2.58%-1.40%2.43%2.74%5.09%3.29%
EUR-2.51%0.08%-3.79%-0.08%0.23%2.50%0.76%
GBP-2.58%-0.08%-3.89%-0.16%0.14%2.44%0.71%
JPY1.40%3.79%3.89%3.87%4.19%6.51%4.81%
CAD-2.43%0.08%0.16%-3.87%0.31%2.54%0.84%
AUD-2.74%-0.23%-0.14%-4.19%-0.31%2.28%0.56%
NZD-5.09%-2.50%-2.44%-6.51%-2.54%-2.28%-1.71%
CHF-3.29%-0.76%-0.71%-4.81%-0.84%-0.56%1.71%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).

BoE FAQs

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

Author

Christian Borjon Valencia

Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.

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