FTSE falls as Bank of England signals interest rate hike

Bank of England governor Andrew Bailey maintains “temporary” inflation hypothesis

The FTSE 100 and FTSE 250 indices traded down by 0.6% and 0.2% respectively by 15:00 (BST) on Monday, as the Bank of England (BoE) once again signalled its intention to raise interest rates. 

Having argued for much of the year that the runaway rate of inflation witnessed in the wake of the Covid-19 crisis would prove to be “transitory”, the Bank of England admitted at the start of autumn that inflation would reach 4% by the end of 2021. 

Despite this shift in opinion, bank governor Andrew Bailey has nonetheless restated his opinion that the recent surge in inflation is not a result of the substantial level of quantitative easing and market intervention pursued by the BoE in response to the health emergency.

Instead, he has pointed to the easing of pent-up demand post-lockdown and global supply chain issues. 

Bailey's latest comments

Speaking as part of an online panel discussion organised by the international consultative body Group of 30, the former head of the Financial Conduct Authority stated: 

“Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations.”

He added: “And that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act. But of course that action comes in our monetary policy meetings.”

Bailey maintained his longstanding argument that high levels of inflation will prove to be temporary, but admitted that the United Kingdom’s “energy story” would likely cause price pressure well into 2022. 

Labour and energy shortages 

UK natural gas futures surged to their highest level on record earlier this month, as inventories ran dry, renewable alternatives such as wind underwhelmed and increased Asian demand made Russian LNG exports more expensive. 

A shortage of heavy goods vehicle drivers, resulting in fewer drivers being available to transport petrol from refineries to filling stations, also led to a rush on the petrol pumps, particularly in the southeast of England. 

Although Bailey remarked that demand for workers in the UK had been stronger than expected, he admitted: “I do have concerns about labour supply growth.”

Last week, the Office for National Statistics found that the UK labour market has its lowest number of unemployed people per vacancy since records began in 2001.

Further reading:  Bank of England officials step up hawkish rhetoric

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