"Risks to inflation are to upside": BoE's Bailey sounds a cautious note
- Andrew Bailey believes the latest UK economic data is slightly stronger and rules out an imminent recession.
- The Governor warns that inflation risks remain on the upside, particularly from energy and food prices.
- Rising energy costs could keep pressure on prices and complicate future monetary policy decisions.
Bank of England (BoE) Governor Andrew Bailey said on Tuesday that he does not think the United Kingdom (UK) economy is on the verge of a recession, with the latest data showing slightly stronger activity, according to Reuters.
Bailey stressed, however, that activity remains weak by historical standards and said that risks to inflation remain tilted to the upside. He pointed in particular to energy and food prices, as geopolitical tensions fuel the risk of renewed price pressures.
Key takeaways
I do not think we are on the verge of a recession.
Latest data is looking a bit stronger.
Activity has been reasonable resilient but weak by historic standards.
Risks to inflation are to upside.
Market's boe rate curve reflects investors' concern about further energy price rises.
I want to dispel idea that we have secret plan to raise rates, unconditionally.
Risks to food price inflation are to the upside.
Us Iran war has LED to high energy prices, they could be higher still.
Ukrainian attacks on Russian refineries also pushing up cost of refined oil products.
Rise in UK mortgage rates is larger than almost anywhere in G7.
Market reaction
The British Pound (GBP) edged slightly higher following Bailey's comments, with GBP/USD gaining 0.11% on Tuesday to trade around 1.3555 at the time of writing.
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.
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