BOE’s Haskel Warns of Inflation, Signals Vote for Rates Hold

(Bloomberg) -- Bank of England policy maker Jonathan Haskel signaled that he will vote to leave interest rates at a 16-year high in his final meeting next month, warning that a “tight and impaired” labor market will keep inflation too high.

Most Read from Bloomberg

The official — who finishes his term on the Monetary Policy Committee at the end of August — said that he needs to see more evidence that underling price pressures are receding before backing cuts despite “encouraging signs” on inflation.

“The continued tight and impaired labor market means that inflation will remain above target for quite some time,” Haskel said in the text of a speech released by the BOE on Monday. “I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably.”

The remarks set up a clash between the hawks and doves on the MPC at the next meeting on Aug. 1, with more policy makers considering a move to interest rate cuts. Haskel and other hawkish rate-setters could be outvoted after minutes from the previous meeting suggested that a decision not to loosen policy was “finely balanced” for some.

Haskel will leave the MPC on Aug. 31 after six years. His yet-to-be-named replacement will be the first BOE appointment made by new Chancellor of the Exchequer Rachel Reeves, whose Labour Party swept to power last week in a landslide election victory. The new member could shift the balance at the BOE, since Haskel is one of the most hawkish of the nine members of the Monetary Policy Committee.

It was the first public speech from an MPC member since a blackout during the UK election campaign. Chief Economist Huw Pill and fellow rate-setter Catherine Mann are due to speak on Wednesday.

Investors have had few clues on how the rate-setters are viewing recent data after headline inflation fell to the BOE’s 2% target for the first time in almost three years. While inflation has fallen further, underlying price pressures and signals from the labor market are still too high for comfort for the UK central bank.

However, markets increased bets on an interest rate cut in August after some policy makers hinted at an imminent pivot in meeting minutes for June. Currently investors see almost a 60% chance of a shift to looser policy next month.

There was little change to wagers on an August rate cut following Haskel’s speech given he is known to be on the hawkish end of the committee.

Haskel said that an “impaired” labor market means that the BOE needs “to set a higher interest rate than they would otherwise have done” to keep inflation at its 2% target. While inflation is at the BOE’s aim, it is expected to tick up later this year and wage growth remains uncomfortably high at 6%.

Haskel said that a difficulty getting the right workers into the available vacancies — known as the “matching process” — has become impaired, meaning a need for a “more ‘hawkish’ outlook to rate setting.” He also pointed out that a 10% increase in the minimum wage in April may also be feeding though to wage-setting more generally.

“There are considerable encouraging signs, most notably from normalizing inflation expectations and a (spoiler: temporary) return of headline inflation to target in May 2024,” he said. “However, the wage-price system in the UK has been subject to a sequence of enormous shocks over recent years.”

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.