BOE’s Greene said monetary policy should lean against the risk of wage growth becoming entrenched at higher levels, according to the FT.
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It is appropriate to proactively tighten our monetary policy stance to lean against the risk of wage growth getting stuck at higher levels.
Other BOE comments this week
Governor Bailey highlighted the potential benefits of AI investment:
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In the UK, economic activity is turning out to be more resilient than we had expected, and some of that is due to AI investment, particularly in the business services sector.
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We are seeing growing signs of the beginnings of a positive supply shock coming from AI and the investment required for that.
Deputy Governor Lombardelli kept a December hike on the table, according to the Guardian:
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A further 25bps rate hike in December is plausible, with every meeting live, but a decision will depend on developments in the Iran conflict.
Breeden commented on businesses’ response to higher costs:
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Firms are now very good at adapting to cost shocks.
Lombardelli also warned about persistent inflation and problems beneath the surface of the labour market:
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In setting monetary policy, will continue to look beyond the headline numbers: at whether hiring is recovering, whether people can move towards the jobs available, and whether labour market weakness is genuinely easing wage and inflation pressures. That evidence will shape judgement of how much further monetary policy needs to go to return inflation sustainably to the 2% target.
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Argues that the conditions for persistent inflationary dynamics over the mid-term are crystallizing.
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The longer energy costs stay high, the greater the pressure there will be on businesses to restore margins.
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Energy shock has become more persistent.
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Greater prospect of second-round effects.
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Balance of inflation risks to the upside.
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The labour market is stuck in low gear; UK has a low-hire, low-fire labour market that creates its own problems; might be necessary to raise rates further in the near term.
On economic resilience and spare capacity, Lombardelli added:
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Policy has been less restrictive than thought, due to economic resilience.
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Hard to determine if the UK economy is more resilient to price shocks, or if the absorption limit is being approached.
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Thinks there could be less slack in the UK economy vs the BOE’s central view, at 0–1% vs 1%.
Analysis:
Greene’s message is hawkish. She favors getting ahead of the risk that wage growth gets stuck at levels that keep inflation elevated. The key word is “proactively.” That suggests a willingness to tighten before the persistence becomes fully established. Lombardelli’s comments lean in the same direction. A weak hiring backdrop does not automatically mean wage pressures are easing, particularly if workers cannot move easily into the jobs available. If the economy also has less spare capacity than the BOE assumes, there is less room for demand to grow without adding to inflation.
For traders, the comments keep the risk of another hike firmly in play, with December a live possibility rather than a commitment. Bailey’s AI comments offer a potentially more favorable supply story over time, but stronger investment also helps explain why activity has held up. The barometer going forward is whether wage growth and business pricing pressures actually ease. A sustained decline in energy costs would help, but if businesses continue passing through earlier cost increases and wages remain sticky, the argument for further tightening stays intact.
The GBPUSD remains near the low for the day as it trades above and below a swing area target at 1.32729.
This article was written by Greg Michalowski at investinglive.com.