BOE rate-setters push back against market rate cut bets
THREE Bank of England (BOE) policymakers warned markets to brace for UK interest rates to remain elevated for a lengthy period of time, the latest efforts by officials to dampen bets on a reduction in borrowing costs by mid-2024.
Deputy governor Dave Ramsden said firms must adapt to a higher rate world after the shift away from the low borrowing costs that marked the post-global financial crisis period.
Hawkish rate-setter Catherine Mann said that policymakers have little scope to cut rates because the UK economy is “growing very, very slowly”.
Earlier, external policymaker Megan Greene said that investors have not understood that structural changes in the economy will likely mean interest rates need to stay restrictive for longer.
The remarks show the latest pushback from BOE officials against markets which are expecting a pivot towards rate cuts by the middle of next year. Traders stepped up those bets after the comments, almost fully pricing in the first reduction in the benchmark lending rate by June and a half-point cut by late 2024.
Policymakers have become increasingly vocal about their determination to keep rates higher for longer despite the market bets. While the latest inflation reading was lower than expected, it remains more than double the BOE’s 2 per cent target and is likely to linger over that level into 2025.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Ramsden said rates are likely to remain higher than they were in the aftermath of the global financial crisis more than a decade ago, according to a text of the speech released on Thursday (Nov 16). He also said there are not any reasons that suggest the BOE needs to adjust its policy to curtail the financial stability risks from higher rates.
“Interest rates are likely to remain higher than for most of that period, and firms must make sure they are able to adapt and manage their risks in a higher rate world,” Ramsden said. “It’s important firms make sure they are protected against interest rate and liquidity risks, including during severe shocks when interest rates can change very quickly, and under different monetary conditions.”
Mann, who was one of three hawkish dissenters to vote for more hikes at the November meeting, said the slow growth of the UK economy means there’s “not a lot of room for me to manoeuvre”.
“If it’s only crawling along, if demand is growing faster than that, it still represents some upward impetus to inflation and the stickiness of some of the components of inflation that are key challenges to achieve the 2 per cent,” Mann said in the Economist’s Money Talks podcast that streamed Thursday.
Greene, who also backed hikes at the last meeting, also warned of higher rates in the long term. While the sharp fall in UK inflation to 4.6 per cent was “good news”, she said the labour market needs to loosen further to bring down “incredibly high” wage growth.
Structural changes to the UK economy mean the policy will need to remain in restrictive territory for longer, warning that “markets globally have not really clocked on to this”.
“The notion that the long-run neutral rate might be a bit higher and, the natural rate of unemployment might be a bit higher, isn’t something everyone’s grappling with,” Greene said in an interview Thursday on Bloomberg TV.
“But it just suggests that the world’s going to look a little bit different once the dust all settles than it did before the pandemic. It suggests we might need to be restrictive for longer.”
She said that markets had “shown significant push-back” against the messages sent by major central banks in the last 12 to 18 months.
Markets are grappling with conflicting signals from a flatlining UK economy and the tight labour market that continues to fuel rapid wage growth. Cooler-than-expected inflation figures on both sides of the Atlantic have stoked speculation of when central banks can move monetary policy out of restrictive territory.
BOE chief economist Huw Pill fuelled these bets last week when he hinted that rate cuts may be on the table by mid-2024. However, governor Andrew Bailey later came out to pour cold water on speculation over rate cuts, insisting it is too early to talk about looser borrowing costs. BLOOMBERG
Share with us your feedback on BT's products and services
