Latest Breaking News & Top Headlines

Economists warn ‘groupthink’ prevents Bank of England from raising interest rates

0

Economists have warned that “groupthink” is preventing the Bank of England from raising interest rates to contain inflation that could reach 6 percent.

Andrew Sentance, a former member of the Monetary Policy Committee, said he was “a little surprised” that there aren’t more voices at the Bank calling for an early easing of rates.

The leading group has so far voted unanimously to keep the level at the record low of 0.1 percent, despite forecasting inflation to exceed 4 percent – double the target.

But cabinet ministers are concerned that the position is “complacent” and that early action could prevent more serious problems.

The comments came as Kraft Heinz warned it can only hope to minimize price increases passed on to consumers amid massive pressures in the global supply chain following the pandemic.

Overall CPI inflation reached 3.2 percent in August and is expected to rise further

Kraft Heinz chief Miguel Patricio said the company is 'raising prices around the world where necessary'

Kraft Heinz chief Miguel Patricio said the company is ‘raising prices around the world where necessary’

The cost of products, including baked beans, is rising in response to global supply chain carnage

The cost of products, including baked beans, is rising in response to global supply chain carnage

On BBC Radio 4’s Today programme, Mr Sentance – who now works for Cambridge Econometrics – said a very gradual easing of interest rates from their record lows to 1-2 percent would be a ‘signal’ that the Bank is committed to reducing inflation. to deal with.

Meanwhile, Kraft Heinz chief Miguel Patricio said the company is “raising prices around the world where necessary” of products, including ketchup and baked beans.

Mr Patricio said this is due to a lack of truck drivers in the UK, a labor shortage and an increase in logistics costs in the US.

He told the BBC that consumers are getting used to paying more for food because of the growing world population and lack of land to grow produce.

But he also said companies should take on the cost increases, adding, “I think it’s up to us, the industry and the other companies to try and keep these price increases to a minimum.”

Speaking about the reason behind the increases, Mr Patricio said: ‘Especially in the UK, with the lack of truck drivers.

“In (the) US, logistics costs have also risen sharply and there is a labor shortage in certain parts of the economy.”

It’s also because inflation was “across the board,” unlike previous years, he said.

Michael Saunders, who sits on the Bank’s rate-setting Monetary Policy Committee (MPC), hinted over the weekend that interest rates could be raised as early as this year.

His comments came as the Bank of England grapples with the inflation problem gripping the economy and whether it will be transient, as initially expected, or a long-term problem.

Households are experiencing a rise in the cost of living amid an energy crisis, labor shortages and supply chain chaos. The confluence of problems is causing commodity prices to rise and energy bills to rise.

Markets are starting to push for a price hike ahead of a December rate hike and in an interview with the Sunday Telegraph Saunders, Saunders suggested this might not be far off the mark.

A rate hike would drive up costs for millions of households with variable mortgages and put pressure on companies that had made ends meet during the pandemic to make ends meet.

It would also raise the interest bill on the UK’s skyrocketing £2 trillion public debt. The nine-member committee will meet again in November and December.

At its last meeting, the MPC voted unanimously to keep the key interest rate at 0.1 percent – the record level it was reduced to when the coronavirus crisis broke out in early 2020.

However, two MPC members voted against continuing quantitative easing at current levels. This is the UK government bond purchase programme, funded by the issuance of central bank reserves, which maintains a target of £875 billion.

At its previous meeting in August, the MPC said the Covid recovery growth and excess demand would cause short-term CPI inflation to rise temporarily – by as much as 4 percent by the end of the year – largely driven by energy and commodity prices.

Bank of England Governor Andrew Bailey faces mounting pressure over stance on inflation and interest rates

Bank of England Governor Andrew Bailey faces mounting pressure over stance on inflation and interest rates

However, it stated that in August, based on market expectations for interest rates at the time, “medium-term CPI inflation was expected to fall back to close to the 2 percent target.”

The September MPC report indicated that thinking may be shifting and added a warning, stating that growth was slowing as inflationary pressures mounted.

It said: “Since the MPC meeting in August, the pace of the recovery in global activity has shown signs of slowing down.

Against a background of robust demand for goods and ongoing supply constraints, global inflationary pressures have remained strong and there are some signs that cost pressures may prove more persistent.

‘Some financial market indicators of inflation expectations have risen slightly, including in the UK.’

There will be no Bank of England rate setting meeting this month, the next one is scheduled for Thursday, November 4. That rate decision comes along with the latest quarterly inflation report — now known as the November Monetary Policy Report.

This more in-depth look at the economy, inflation and monetary policy will be eagerly awaited for signs that interest rates could rise earlier than expected.

One factor that will come into play for the Bank of England is that inflation and concerns about it could already alter consumer behavior and slow growth, potentially reducing the demand-driven element of the cost of living.

In contrast, household finances are under pressure as essential expenditures are trapped in the inflationary net, while energy and petrol prices have risen significantly.

Kevin Brown, savings specialist at mutual fund Scottish Friendly, said: ‘Our own analysis estimates that households are already taking in an average of £441.64 in energy and petrol price hikes this winter.

If petrol prices exceed £1.60 per litre, households could pay more than £700 extra per person, or more than £1200 for a couple who both rely on cars for their commute, which is not uncommon outside London.

“With gasoline and energy making up about 40 percent of the US inflation basket, the overall cost of living increase could be much higher than this.

‘In short, this is totally untenable. Wage increases are all well and good, but if the cost of living rises at the same time, all those gains will be wiped out. And let’s not forget that from April, workers will also have to swallow big tax hikes from the National Insurance increase, which will add at least another £254.15 to the tax bill of an average wage earner.

“Let’s hope the Chancellor has some rabbits in store to offer help by the end of the month. As it stands, the Bank of England and the Prime Minister are washing their hands of the matter, and the outlook for the rest of us is downright bleak.”

.

Leave A Reply

Your email address will not be published.