Advisers to Chancellor of the Exchequer Jeremy Hunt are increasingly concerned that the Bank of England risks raising interest rates too much in the coming months, potentially pushing the UK into an unnecessary recession.
(Bloomberg) — Advisers to Chancellor of the Exchequer Jeremy Hunt are increasingly concerned that the Bank of England risks raising interest rates too much in the coming months, potentially pushing the UK into an unnecessary recession.
A majority of Hunt’s seven-member Economic Advisory Council believes that the bank should slow its fastest cycle of rate increases in three decades, according to people familiar with the discussions. That view is being taken by seriously by top Treasury officials in the wake of better-than-expected inflation figures and other data that suggest a broader slowdown, said the people, who asked not to be named discussing internal deliberations.
The advisers have told Hunt that they expect the rate of inflation to fall sharply by year end, following trends in the US and elsewhere, the people said.
Some members of the panel worry that the central bank might feel public pressure to continue tightening for longer after criticism that it was too slow to move to start moving to address inflation in December 2021. One of the people described the advisory council’s view as near unanimous.
Both Hunt and Prime Minister Rishi Sunak have repeatedly backed the BOE, which has had sole authority to set monetary policy for the past quarter century. The Treasury said in a statement Wednesday that it works closely with the Bank of England to ensure that fiscal and monetary policy is aligned.
“The Economic Advisory Council provides independent, expert advice on economic policy to help grow the economy – their views do not reflect the views of the government,” the Treasury said. “Monetary policy is the responsibility of the independent Monetary Policy Committee at the Bank of England, and the government remains fully committed to the MPC’s independence and the inflation target of 2%.”
The discussion comes as the BOE’s Monetary Policy Committee prepares for its next decision on Aug. 3, its first chance to adjust rates since announcing a surprise half-point increase in June.
Traders trimmed wagers on further rate hikes after the report and decisions from the European Central Bank and US Federal Reserve that signaled further increases are possible. Market pricing now favors a quarter-point increase from the BOE in August. They also continued to pare bets on how high interest rates would rise this cycle, with pricing for the terminal rate edging back below 6%. That’s down from more than 6.5% expected earlier this month.
Given recent discussions on the interest burden on fiscal deficits, there could also be repercussions if the market reads this as the Treasury influencing the BOE, according to Rishi Mishra, an analyst at Futures First Canada. “Ultimately, the BOE has to be able to hike as many times as needed to calm inflation,” he said.
At least one member of Hunt’s committee, former BOE Chief Economist Andy Haldane, has publicly called on the central bank to “press the pause button” next month and “see what effect the medicine already administered is having.” At least three others have privately backed a slow down in the pace of increases, according to people familiar with the matter.
Karen Ward may represent a more hawkish voice on the council. JPMorgan Asset Management’s chief European market strategist defended BOE rate hikes in The Times newspaper earlier this month, saying the bank “faces the choice of being unpopular today by delivering a mild recession, or being deeply unpopular in the future by having to create a deep recession.”
More UK economists, including Bloomberg’s own analysts, have raised the possibility of a recession in the wake of the bank’s most recent rate hike. That would put Sunak on course to enter an election year in a downturn, at time when polling experts are already forecasting a defeat by his Conservative Party.
One senior government official cited Bloomberg’s interview last week with former BOE Governor Mervyn King as reflecting a view that Treasury advisers were considering. In it, King warned that the BOE risked making a “big mistake” if it continued to hike. He pointed out money-supply indicators suggest that inflation is headed for a rapid drop.
Mervyn King Says BOE Is Making a ‘Big Mistake’ (Podcast)
Economists estimate that it takes about two years for rate changes to be felt fully on the ground. Treasury advisers have cited a survey by S&P Global Market Intelligence showing that British companies reported their slowest growth in six months in July as the latest evidence that elevated rates were beginning to take their toll.
Bailey and other BOE policymakers have become much more cautious in recent months about signaling higher rates. After a string of hikes throughout 2022, the nine-member policy committee adopted more neutral guidance in February, saying that “further tightening” would be needed “if there were to be evidence of more persistent pressures” on inflation.
Whether government officials have communicated any apprehension about the BOE’s current path is unclear. UK officials have sought to avoid any appearance of interference in the bank’s efforts to set monetary policy since then-Prime Minister Tony Blair and Chancellor Gordon Brown moved to establish its independence in 1997.
While Hunt and Bailey meet regularly, the main mechanism of public communication between the two comes through an exchange of letters after rate decisions when the bank has missed its 2% inflation target. The next such correspondence is expected in September.
After the bank’s June rate decision, Hunt signaled no differences with the bank, saying that “tackling inflation relentlessly must be the immediate priority.” Sunak similarly praised the BOE’s efforts to slow inflation, which he called “the enemy that we need to conquer.”
Still, chancellors have used their public communication with the governor to press for policy shifts. When he was in the role in June last year, Sunak told Bailey he expected the bank to “take the action necessary to get inflation back on target.” The BOE followed through at the next meeting with its first half-point increase of the rate-hike cycle.
–With assistance from Constantine Courcoulas, Andrew Atkinson and James Hirai.
(Updates with market bets and ECB. An earlier version corrected the title of Karen Ward.)
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