Hawkish noises from the Bank of England were heard by the markets – but for how long?

Two MPC members made it clear more rate rises are coming and the pound reacted accordingly. But the committee is going to have to turn talk into action if it wants to retain its credibility, writes James Moore

The Bank hiked rates by 0.25 per cent last week but others went further (PA Wire)

Are we seeing signs of regret from the Bank of England over its most recent decision to avoid the aggressive rate rises imposed by other central banks?

Catherine Mann gave warning on Monday that its rate-setting Monetary Policy Committee (MPC) was in danger of falling behind its peers, with potentially nasty consequences.

Its more doveish approach, she warned, risks stoking more short-term inflation in Britain by sparking a flight from sterling to places offering higher rates. The US in particular. The Federal Reserve moved its rates by 75 basis points while the MPC was inching Britain’s up by just 25. US rates now stand at 1.75 per cent compared to the UK’s 1.25 per cent, a 50bp gap.

There is a risk posed by a more aggressive stance, Mann accepted, namely to medium-term economic activity. But with short-term inflation as high as it is, well, you do the maths.

Also of note was Mann’s fear that domestic price rises are becoming more embedded, which runs contrary to the prevailing narrative that the crisis – an entirely apt word given the real-world consequences of the current surge in prices – is a transitory one.

Of course, Mann is one of the committee’s rate hawks, having voted for a 50bp rise at the last three MPC meetings, along with two of the other external committee members. So while the speech was fairly blunt, it shouldn’t have surprised anyone.

The markets, however, took note of both her comments and the ones that followed it from Huw Pill, the Bank’s chief economist, while he was attending an accountants’ conference.

“We will do what we need to do to get inflation back to target. And at least in my view, that will require further tightening of monetary policy over the coming months,” Pill said.

He also voiced concerns about price rises developing a “self-sustaining momentum” and repeated the MPC’s previously stated willingness to act “more aggressively” if necessary.

“Monetary policy is not a panacea. Monetary policy is not an instrument that allows you to achieve lots and lots of different things at short term: stabilise the exchange rate, fine-tune developments in employment or activity,” he added.

True that. It is a blunt instrument, which the MPC’s critics, including some of the Tories’ dimmer lights (and I know that’s saying something), don’t tend to take into account.

Pill, Mann and their colleagues are in a fairly invidious position, as I noted last week. But it may be time to bite some bullets, however unpalatable that may be.

Kantar, the researcher, showed why. Its latest missive on the grocery market found food price inflation hit a 13-year-high of 8.3 per cent based on data from the last four weeks. That represents an annual £380 punch in the mouth to a typical family.

We’ve become used to hearing about the sickening dilemma faced by poorer Britons: heat or eat. But what if you can’t heat or eat?

That may happen this winter. Charities have become increasingly concerned about the number of people turning to borrowing to pay for essentials, like food. This is simply unsustainable. The consequences scarcely bear thinking about.

There was a little ray of light coming from the CBI. Its monthly industrial price balance – showing firms’ expectations for selling prices over the next three months – dropped to plus 58 in June from plus 75 in May, its lowest level since September.

While that is still far above the series’ long-term average (of plus five) it is a rare sign of inflationary pressures easing as we await the next, likely grim, official number.

Back to the MPC: comments from people like Mann and Pill don’t happen by accident. The markets know that and they appeared to take them on board. The pound posted modest gains against the dollar on the back of them.

Still, there has been a lot of noise out of Threadneedle Street about doing what it takes and the MPC’s willingness to act and so on but rather less sign of that translating into action.

If the Bank continues its softer approach to rates when compared to its peers, the markets may prove less tractable next time around. The hawks’ cry needs to be heards a little louder at the next meeting.