LONDON: Bank of England (BoE) policymaker Megan Greene says the case for raising interest rates is strengthening as the Iran conflict continues, a sign more officials could soon join chief economist Huw Pill in calling for action against inflation.
Greene, one of the BoE’s most hawkish voices, said a prompt increase in borrowing costs may be necessary to keep inflation expectations in check, stressing that the speed of the response to the threat is as important as the size.
“I think the case for hiking rates grows as the conflict wears on and I believe a tightening in monetary policy over the next few weeks or months may be necessary,” Greene said in a speech at the University of Derby’s business school.
The BoE’s Monetary Policy Committee (MPC) announces its next decision on June 18.
While only Pill backed an immediate increase in rates in April, several officials including Greene signalled they would contemplate a hike if the war dragged on.
Reports suggested the United States and Iran are nearing a deal, but it is unlikely to produce a permanent solution to the conflict.
Damaged energy infrastructure in the region will also take time to rebuild, delaying a return to flows of oil and gas at full capacity.
Meanwhile, UK inflation is expected to near 4% later this year as energy bills for households and businesses climb.
Money markets are fully pricing in a quarter-point rate rise by September with an 85% chance of a further hike by the end of the year.
“Even if the war ends today and the Strait of Hormuz reopens fully and immediately, the macroeconomic impact will continue to be felt over the coming year,” Greene said.
She said that the second-round effects on inflation will likely be somewhere between the more benign 2011 experience when energy prices spiked and the 2022 gas shock following Russia’s invasion of Ukraine.
It is more likely to come through firms passing on higher costs than workers demanding wage hikes to compensate for elevated inflation, Greene added.
Greene, who voted with the majority eight-to-one to keep rates on hold in April, said the central bank shouldn’t rely on markets tightening financial conditions “to do our work for us”.
However, her remarks struck a different tone to those of governor Andrew Bailey, who was appearing in front of the House of Lords Economic Affairs Committee when Greene’s speech was published.
“I do think we actually have a bit of time, not least because we have in effect tightened policy,” he said.
Bailey signalled he was in no rush to raise rates yet amid a more fragile demand picture due to the Iran energy shock.
It is a sign the MPC could soon be split into the two camps that divided the panel before the war.
While the split then was over how quickly to reduce rates, now officials are considering the balance between containing the spike in inflation and supporting a tepid UK economy.
Bailey warned the UK economy faces a worrying combination of an ageing population and rapidly rising levels of young people out of work and education.
“If you combine an ageing population and lower levels of participation in the labour force by young people, then you become more worried at that point,” he told the committee.
“If you combine those two things together, I think that’s a very, very important issue, and a very serious issue.”
Bailey’s comments came amid growing angst among UK officials after the number of young people not in education, employment or training, known as NEETs, hit one million for the first time in more than a decade.
There are concerns that youth unemployment could leave a lasting legacy on the careers of young people, hamper economic growth and tax revenues, and push up the state’s already-elevated welfare bill.
Last week a government-commissioned review by former Health Secretary Alan Milburn warned the United Kingdom risks creating a “lost generation”, as ministers seek to understand the drivers of the crisis.
In a separate appearance on Tuesday, BoE rate-setter Swati Dhingra suggested that Britain will have to move closer to the European Union (EU) as global trade frictions grow.
“Typically when you have a trade war, you’re going to have to sign up with some large partner if you’re a mid-sized economy,” she said at a Resolution Foundation event.
“My version of it is who’s the most certain trade partner in this case, and the EU looks overwhelmingly as that promising party, as opposed to the United States, and definitely as opposed to China.” — Bloomberg
