Bank of England finds itself in Catch-22 as rates rise beckons in December

If the UK economy remains on its current trajectory, the Bank of England will have to raise interests, according to the central bank’s governor, who added that the current situation is “febrile”.

Despite data showing that employment is continuing to rise upon the conclusion of the furlough scheme, as well as inflation reaching its highest point in ten years, Andrew Bailey’s words suggest that a rise could take place in December.

Investors previously expected rates to rise this month, and are now betting on them moving in December, with a minimal increase expected initially.

It will be the first time since 2018, bringing the cost of borrowing up from a historic low of 0.1%

Speaking to the Sunday Times, Bailey said it is important to distinguish whether or not the tightness of labour supply resulted in higher wage demands, which could keep inflation above its 2% target.

“A, activity in the economy is slowing. B, the proximate cause of many of these inflation issues is on the supply side, and monetary policy isn’t going to solve these directly,” said Bailey.

“It doesn’t get more gas, more computer chips, more lorry drivers”, he added.

He continued: “And C, however the concern for us is what they classically call ‘second-round effects’, particularly in wage bargaining and the labour market . . . If the economy evolves in the way the forecasts and reports suggest, we’ll have to raise rates.”

On the other hand, if Bailey and the Bank of England underestimate the real threat of inflation, there will be risks on both sides.

“You’re in a fairly febrile world,” said Bailey. “There are risks both ways. Obviously, our concern would be that if it gets into second-round effects, it [inflation] could be elevated for longer.”

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