Bank of England Chief Economist Huw Pill said the central bank does not intend to repeat the aggressive rate-hiking cycle of 2022, and signaled that interest rates could remain on hold — or even fall — if economic growth stalls next year.

Pill's main points:

• Limited evidence of second-round effects from higher energy prices
• The decision to raise rates was pre-emptive in nature
• Activity and employment are adding to demand at the margin
• Pipeline pressure is building in the system from energy prices
• "We are not going to repeat 2022 rate hiking cycle"
• Nothing is baked in for interest rates next year; the outlook becomes more uncertain from spring
• The bank rate could stay on hold or even fall if growth stalls next year
• The key determinant will be the margin squeeze on companies and how they react
• The Bank is putting weight on pay bargaining, costs and pricing

Pill reiterated that there is still limited evidence of second-round effects from higher energy prices — the channel through which an initial energy shock feeds into wage bargaining and broader price-setting — and described the recent decision to raise rates as pre-emptive in nature, aimed at containing inflationary pressures before they become more persistent. He acknowledged differing views within the Monetary Policy Committee (MPC), the Bank's rate-setting body: while activity and employment continue to add to demand at the margin, higher energy prices are creating pipeline inflationary pressures that the Bank needs to monitor.

Pushing back against expectations of a predetermined policy path, Pill said nothing is baked in for interest rates next year and that the outlook is likely to become more uncertain from the spring. His remark that rates could stay on hold — or even fall — if growth stalls stood out as dovish coming from a hawkish member of the committee, a signal that carries added weight with markets currently pricing roughly even odds of a December hike.

According to Pill, the Bank is seeking to contain the risk of energy-driven inflation becoming entrenched without committing to an extended tightening cycle of the kind deployed in 2022, when rapid back-to-back increases were used to counter an inflation surge driven largely by energy costs. Any further rate hikes will depend heavily on whether inflation pressures broaden and whether the economy can withstand the squeeze on businesses and households.

Markets are currently pricing a 50% chance of a rate hike in December and a cumulative 68 basis points of tightening by the end of 2027. Much will depend on US-Iran developments and incoming economic data, with the pay bargaining, company cost and pricing indicators the Bank says it is weighting among the markers to watch as the outlook becomes more uncertain from spring.

Source: ForexLive