The credibility of the Bank of England remains at stake

safiya982

The Bank of England got away with inflation — and, implicitly, its own critics — when it raised interest rates twice as much as investors expected on Thursday. That markets have largely taken the move in stride is a sign of how serious they believe Britain's persistent inflation problem has become. The 50 basis point increase, which took the base rate to 5 percent, the highest since 2008, and the aggressive tone in the accompanying statement were welcome signs of the intention to rein in sky-high prices. But the BoE must do much more to regain the confidence of investors and households that it is up to the task. There is no longer much doubt that Britain is an inflation outlier. While price growth has fallen recently in the US and eurozone, it remained stagnant at 8.7 percent in the UK last month. One or two upside surprises in wages and inflation earlier this year were easier to see, but have now become a trend.


Core price inflation, which excludes energy and food, rose in May to its highest level in more than three decades, but is falling in the United States and Europe. The BoE can no longer hide behind global price pressures. Britain has its own Russia Mobile Number List inflation problem, and errors of judgment by the bank's Monetary Policy Committee have contributed to it. A priority for central bankers during this rate-hiking cycle was to avoid a feared “wage price spiral”; when high inflation takes hold as rising prices raise wage demands in a self-reinforcing process. The chance of this happening in the UK has risen sharply (annual wage growth recently reached 7.2 per cent) as the BoE has consistently underestimated the risk of price growth becoming persistent. In fact, in March, its governor, Andrew Bailey, noted that interest rates, then 4 percent, were near their peak.




Central bank governors embody their institution, and Bailey too often appears to be behind the curve rather than ahead of it. Britain's extremely tight labor market hasn't helped. High levels of inactivity and changes to immigration rules post-Brexit have exacerbated staff shortages, adding to wage pressures. This is outside the MPC's control, but its inability to accurately assess the lack of additional capacity in the labor market has only made matters worse. The BoE's recently announced plan to review its forecasting processes will be important to avoid similar errors in the future. Confidence in the bank's understanding of the economy is key to managing the rate and inflation expectations of investors, businesses and households. With each missed forecast, that has begun to evaporate. A BoE survey showed public satisfaction at the institution had fallen to a record low last month. Financial markets have also raised their expectations for year-end rates to 6 percent, from 4.5 percent at the beginning of the year.