Huw Pill believes the UK's interest rate hikes this year will be up to 1 per cent at most, instead of the 1.2 per cent that market participants are currently pricing in.
Over the past few months, analysts have warned that market expectations of a UK central bank (BoE) rate hike may be overblown. A BoE official yesterday indirectly agreed with the warning. He believes the UK's interest rate hikes this year will be up to 1 percent at most, instead of the 1.2 percent that market participants are currently pricing in.
To Limit Market Expectations
The BoE's Chief Economist, Huw Pill, acknowledged that UK inflation pressures are currently very high. The biggest contributor to inflation is the spike in global energy prices. In addition, employee salary growth is quite fast.
"Recent data confirms that the UK labor market is tight. Tighter than we expected when the previous Monetary Policy Report was released in November (2021). And we expect (the labor market) to be even tighter in the months to come," said Huw Pill.
BoE economists expect salary growth for 2022 to be close to 5 percent. The forecast for further employee salary growth raises the urgency of a rate hike in the near term. However, the increase in interest rates should not be excessive.
Pill said he had recommended a 25 basis point rate hike at the BoE's February 3 policy meeting, instead of 50 basis points. This is because the salary growth is already appropriate to support the medium-term inflation rate according to the central bank's target.
He stated, "Following the implication (expectations of rate hikes) that the market is expecting to reach 1.2 percent by the end of this year will keep inflation below target. I leave it to you to conclude where the MPC (BoE) projects the path (rise) of bank interest rates. ."
The alumnus of the Universities of Oxford and Stanford believes tighter monetary policy may be necessary if the impact of salary growth and other inflationary pressures is stronger than expected. On the other hand, a fairly loose monetary policy may be maintained if energy prices fall.
He emphasized that in the future he will remain committed to making decisions based on data. However, in the meantime, it is important to limit market expectations.
"Limiting our own (rate hike) to 25 basis points now - albeit with the opportunity to raise it again in the months to come - is an investment in stemming market expectations of aggressive 'activism' which I think is worth it," concluded Pill.
Sterling Keeps Calm
The pound sterling did not react to anything following Pill's comments. GBP/USD remains relatively flat around 1.3530s in the Asian session (10/February), while EUR/GBP is stuck an inch below the 0.8450s for three days in a row.
BoE Governor Andrew Bailey is due to make a public appearance today and may provide other clues regarding the BoE's interest rates going forward. Meanwhile, market participants are also waiting for the release of US inflation data later tonight. The data is quite crucial for interest rate expectations of the Fed and other central banks who are willing to follow in his footsteps.
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