BOE official says markets right to price in quicker tightening

London

A BANK of England (BOE) policy maker said markets are right to price in an earlier interest-rate hike than previously expected as inflation accelerates.

Michael Saunders, a member of the central bank's Monetary Policy Committee, was quoted as telling the Telegraph he's concerned that capacity pressures and higher pay growth are driving an inflation pickup that "could become more persistent unless monetary policy responds".

"I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously," said Saunders, one of two policy makers who voted last month to end the BOE's bond-buying programme immediately.

Saunders has emerged as one of the more hawkish BOE officials in the past few months and his comments will vindicate investors who are betting on an imminent rate hike, though he said he's wary of telegraphing the bank's intentions "too precisely".

BOE Governor Andrew Bailey warned last Saturday of a potentially "very damaging" period of inflation for British consumers, comments that are likely to boost bets that he favours an imminent increase in interest rates.

In an interview with the Yorkshire Post, Bailey said he's concerned that prices have accelerated beyond the BOE's 2 per cent target, and warned that it will likely even exceed the central bank's latest forecast. "We have got to, in a sense, prevent the thing becoming permanently embedded because that would obviously be very damaging," he said.

The BOE said last month inflation would probably exceed 4 per cent in the last quarter of this year. Investors have loaded up on bets on faster BOE rate hikes in recent weeks. Markets are almost fully pricing in the first move by the end of this year and see the rate, now at 0.1 per cent, hitting 0.75 per cent in 2022. In its last meeting, the policy committee raised the possibility that it could act as early as November if deemed necessary.

Crucially, the governor also said he doesn't anticipate a further increase in unemployment, the Yorkshire Post reported, even after the government ended its furlough programme last month. Economists widely expect the BOE to weigh jobs data following the end of the programme before deciding whether to raise borrowing costs.

A flurry of news recently undercut the BOE's original view that much of the jump in prices will prove transitory, and comes amid growing bets that spiking inflation will force the BOE to hike interest rates in the near future.

"This has been an almost unprecedented set of events," Bailey said. "They are not over yet, that we are learning. We have to manage our way through them, and we will do that."

Bailey's comments come after the BOE's new chief economist Huw Pill said recently the current spike in inflation in the UK will last longer than originally thought. BLOOMBERG