Transcription
Well, I just begin. I don't use the term hawkish hold. Um, it's a hold, though, certainly. There are two things that really are the building blocks for me of this decision.
One is obviously the events in the Gulf and the impact that's having on energy prices. And it's not just the level, it's the volatility. And it's the difficulty of frankly reading, I think, you know, where's all this going to? Um, but obviously, you know, we have got higher energy prices, um, and that will feed through.
And then the second thing is exactly that point, which is, uh, there's a sort of transmission. So, yes, it's already fed through in sort of in the sense of the direct effects. So, it's obviously the pump price, for instance, that has adjusted. But then you, you know, we we get what we call indirect effects. So, it goes through into things like food and processed food, and then it goes through into sort of second-round effects and where it gets embedded more in the economy. And that's the thing that we have to watch very carefully, 'cause it's the thing that we can influence.
Now, so the first bit, energy prices, yes, we're seeing high prices, we're seeing more volatile prices. On the second part, on the second-round effects, you know, underlying inflation has been below where we expected it to be. Even, you know, if you go back to April when we were last here, um, you know, inflation's come out lower than we thought it would be. So, the signs are that this disinflation that we've been talking about for some time now, a year or two now, uh, you know, it has continued.
I think that's the, if you like, that sets the scene for how the energy effects can come through, but it doesn't answer the question, um, because we've yet to see that posture. And obviously, the energy shock is different, but I think we are operating in a in an environment of of underlying disinflation and sort of yet to start with. And I think we're operating with some softening of the labor market. I think we've got a bit of an an output gap opening up now. And so that is a conditioning effect. So, that's why, you know, I'm I'm quite resistant to the term hawkish hold. It it's a hold. And I think we've got a lot of uncertainty, and we've got to judge these effects as they come through. So, higher energy prices, but then the pass-through question against a background which has been softer going in.
>> So, in your paragraph, you said that financial conditions have tightened, that these conditions and the upward-sloping yield curve are weighing on nascent inflation. Um, so, given those comments, I want to ask you, is it the upward-sloping curve that keeps inflation on target, in which case you will have to deliver rate rises to validate it, or would you deliver, or would that deliver an undershoot of inflation that, as the forecast suggests?
>> Well, the thing is that, unfortunately, given the volatility of the situation we're in, there's a lot more uncertainty around even what we. Yeah, we have reintroduced the central projection, our baseline projection, call it what you like. But, honestly, it does not have the same probability attached to it as we would normally do. And that's important for sort of in a sense answering. It's a good question, answering your question, and sort of conditioning of that position because I think the best thing to say is, look, there are ways in which this can unfold, yeah, which would undoubtedly, I think, cause us to have to raise rates. But, there are also ways in which it can unfold which will not cause us to have to raise rates. And that's the uncertainty around the pass-through of this effect, how big the effects are going to be, and how they pass through.
>> And would you hike rates as a as sort of insurance hike against those second-round effects even if you haven't seen them yet?
>> Well, I think the thing with second-round effects is you can't wait for the sort of the final reckoning, as it were, because it's too late. Uh, because they come through over the whole, what we tend to call transmission period of monetary policy. So, we always talk about monetary policy taking its effect over, you know, year, two, three years. Uh, if you wait that long to get your final tally, as it were, you've waited too long. So, there will come a point when we have to. Well, we we have to make that call at every meeting, but I think there'll come a point where that call will become, you know, frankly, you know, very prominent. And we don't at this stage know what that call will be because of the uncertainty.
>> And shifting gears to the QT process, I mean, you previously given to a a nod to to continuing that and we've seen the push up in in in gilt yields and the cash flows and things. Is there scope for thinking about how this things like QT interact with fiscal policy given we do have a reset, we do have a new Prime Minister?
>> So, I can tell you with absolute certainty that we will make a decision in September and announce it at the time of the September meeting of the MPC. We've, yeah, in a sense reset out this this morning. We've not changed them, we've just essentially done the reminder of what the principles that we operate under in making these decisions. Obviously, market functioning is one of those, but there are others and, you know, we will make the decision for September taking all that into consideration as we always do and I think the the most important thing is I'm not going to start entering into speculation as to what the decision is because we haven't taken it yet.
>> And of course, there's been several Prime Ministers now since you've taken the helm at the Bank of England and the incoming government, Andy Burnham, they're going to be setting out, I mean, their autumn budget down the line. And given the capacity of course for these fiscal policy decisions to have massive impact on monetary policy, I mean, when you've spoken to the Prime Minister or and the Chancellor, I mean, what kind of thoughts have you had?
>> Well, I think that the government is what? A week and a half, not more than that, is it old? That's that may be a long time in politics, but it's not in economic policy making. I think it's very important that the government has the space, the opportunity to form its views on what it thinks are the right policies, to form its plans, to do all the work that goes into a budget, which is huge. Uh, you know, my, you know, my biggest concern is to make sure they have the space and the time to do that and the last thing they need is people like me sort of, you know, intervening in the space because that's not helpful. So, we will approach this budget as we always do with budgets. We're We'll know when the date is when, yeah, when the time comes, uh, to set the date. Uh, we always condition our view on announced fiscal policy, and that's how we will approach it.
>> And we've seen with Kevin Warsh at the Fed, and I know you can't comment on Fed policy, but we've seen this scrapping of forward guidance. Um, I wanted to get your views though about how you balance that kind of thinking within the Bank of England between explaining why you made decisions versus being too tied to the guidance in an uncertain world.
>> I think the term forward guidance is an oversimplification. It It's an It's It's a neat term as it rolls off the tongue, but actually, I think we have to be careful what what it actually means. So, let me paint two pictures. I'd uh At one end of the spectrum, monetary policy is necessarily set on a forward-looking basis because we can't influence inflation tomorrow. We can influence inflation over the transmission period. So, everything we say in a sense therefore has to have an eye on the future. And we make a lot of comments about that, and we tell stories about that. I mean, that's our job. We We you know, in a sense we paint a picture. And it's a picture of what we think is to come. And I think we have to do that. I don't I don't call that forward guidance, but it is offering a view obviously on how things will evolve.
Now, the other end of the extreme, other end of the spectrum is what people tend, borrowing from Greek mythology, called Odyssean guidance. You know, Odysseus bound himself to the mast and plugged his ears and to resist the temptation. Where you say that's a bit of a sort of It's a bit of a sort of an adaptation, I think, of the of the Greek mythology to say you you pre-announce, "If the following happens, I will do the following." I I think frankly that, you know, I I don't We We We never went down that road, but I think those who have have said, "Honestly, the risks of our just too great. It doesn't really work."
>> Just one final question just on that because you you've talked about the forward-looking risks of the upside to energy prices and but then the data here in the UK is being relatively soft with CPI and undershooting. So, how do you balance then the that and the communicating specifically, I guess, the dovish interpretation of the data with a hawkish risk skew?
>> Well, I think you have to come back to the first element of the story, which is the huge uncertainty around what's going to happen and what is happening and what may happen in the Gulf. Uh, because of this volatility of energy prices. I mean, let's get let's go back to earlier this week. I think I think I'm right in saying that by Tuesday afternoon, energy Brent oil price was down 15% from where it had started the week, but now it is back. It's retraced, you know, quite a bit of that territory. So, since that's the world we're living in, so that's a hugely uncertain world and that conditions obviously then the, you know, the pass-through.