BOE chief economist Pill says choosing to hold on rates is not a passive choice
The desk interprets the recent remarks from BOE Chief Economist Huw Pill as a clear signal of the Bank of England's commitment to maintaining flexibility in its monetary policy. Per the full note source, Pill emphasized that the decision to hold rates steady is a proactive choice rather than a passive one, indicating a readiness to respond to inflationary pressures, particularly from elevated energy prices. This aligns with our view that the BOE is navigating a complex inflation landscape, where second-round effects could push inflation higher than currently anticipated. With the consensus target for GBP/USD at 1.075, the market is poised for volatility as traders assess the implications of these comments on future rate decisions.
What the desk is arguing
The desk frames this as a pivotal moment for the BOE, highlighting Pill's assertion that maintaining the bank rate is a deliberate action aimed at preserving flexibility. This stance is crucial as it underscores the BOE's intent to avoid being locked into a specific rate path, especially in light of rising global energy prices that pose inflation risks.
Pill's comments reflect a broader concern about inflation persistence, particularly with the potential for second-round effects to emerge from the current energy price shock. He noted that these effects could skew inflation expectations upward, which reinforces the desk's view that the BOE may need to act sooner rather than later to mitigate these risks.
Where it sits in our coverage
Our consensus target for GBP/USD is 1.075, with a range from 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan and citi, which are positioned at the higher end of the range, while bofa represents a more cautious stance at the lower bound. The desk's call is consistent with the prevailing sentiment that the BOE may need to tighten policy in response to inflationary pressures.
How other firms see it
Firms like jpmorgan and citi are aligned with the desk's interpretation, emphasizing the need for a proactive approach to interest rates given the inflation outlook. Conversely, bofa holds a contrary view, advocating for a more cautious stance amid concerns over economic growth.
Traders should also monitor the GBP/EUR trajectory, which may reflect the BOE's rate path, as well as the potential impact of upcoming inflation data releases on market sentiment.
What the calendar says
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Choosing to keep the bank rate unchanged is not a passive choice It is a deliberate action in deciding to maintain interest rates as it is BOE does not want to lock itself in on interest rates, need to remain flexible Have stressed that we are ready to act if necessary The board has varied opinions on second-round effects Pill was the lone dissenter in wanting to raise the bank rate to 4.00% but he's not being too pushy with his case from the remarks above. They are mostly a rehash of what governor Bailey mentioned yesterday. So, I'll just leave this passage from Pill himself in justifying his vote to want to raise the bank rate from the day before: "Events in the Gulf have left the outlook for global energy prices elevated and more uncertain.
That uncertainty is unlikely to dissipate soon, but it is nonetheless clear that higher energy prices represent an inflationary shock to the UK economy. Second-round effects in price and wage-setting stemming from this shock have the potential to raise UK inflation beyond the near term in a persistent manner. Our scenarios illustrate how a stronger impulse to inflation may strengthen second-round effects.
But I see the risk of second-round effects in each of these scenarios as skewed to the upside. I recognise that second-round effects may be more modest with a looser labour market. But structural change in price and wage-setting, and the impact on inflation expectations of greater attentiveness to, and salience of, energy and food prices, may strengthen second-round effects beyond what is captured in those scenarios.
As someone already concerned about a stalling of the underlying disinflation process even before the latest energy price shock, a prompt but modest hike in bank rate will help mitigate upside risks to price stability stemming from a re-emergence of intrinsic inflation persistence." This article was written by Justin Low at investinglive.com.
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