The new BoE deputy governor Hogg, for Markets and Banking, took office on March 1, 2017, replacing Minouche Shafik. Why does she believe that the BoE will not return to higher interest rates any time soon?
7 March, Orbex – Charlotte Hogg was formerly working in the role of a Chief Operating Officer (COO) for the Bank of England. She was responsible for overhauling the central bank’s monetary policy. Along with the banking regulation departments. Ms. Hogg, 46 gave evidence to the Treasury Select Committee last week. Where she said that while her colleagues were expecting a gradual slowdown in consumption and consumer sentiment. She felt that it could drop rapidly.
The new BoE deputy governor Hogg noted that rising inflation alongside a squeeze in real income growth in the UK households meant that the spending power was being squeezed. She warned that that consumer sentiment could shift rapidly. Citing the 1.8% increase in the headline CPI against a 2.6% increase in the nominal wage growth. As of the latest data obtained before February 28th.
New BoE deputy governor Hogg does not see a return of high rates
“It seems likely that real income growth will be stagnant over the coming quarters,” Ms. Hogg told the Treasury Select Committee. She noted that a return to higher interest rates any time soon is not plausible. The BoE deputy governor said that the structural factors were one of the reasons for the equilibrium rate to be low. Hence, it would remain so even after the monetary policy committee wil begin to unwind its asset purchases.
“The MPC’s current forecast assumes steadily slowing growth in consumption. Facilitated by a continued fall in the savings rate. But I can envisage scenarios in which the reaction of consumption could be more sudden,” Hogg said.
Despite disappointing investors who were hoping to see some hawkish signals from the new policymaker. Ms. Hogg remained optimistic on the business outlook after the June referendum last year. “In my experience businesses are very good adapting to change,” Hogg said. Noting that she envisages upside risks to business investments as soon as new trading arrangements become clearer.
Timing of unwinding BoE’s asset purchases is questioned
Ms. Hogg also questioned on the timing of unwinding the central bank’s asset purchases. To which she said that the MPC agreed not to unwind its asset purchases until the bank rate was raised significantly. As she ruled out that it will not happen anytime soon.
The new policy makers comments come at a time when sentiment in the British pound is mixed. As the initial resilience after the Brexit referendum last year is showing signs of fading. Especially with wages not catching up to the pace at which inflation was rising. The central bank, at its last meeting, signaled that it was staying on the sidelines. While noting that the balance of risks was equally biased. The central bank also noted that it would be forced to raise interest rates. If inflation continued to accelerate, but also warned that consumer spending and the sentiment was just as importance. Noting these as the downside risks that could call for further rate cuts.
While inflation in the UK has been steadily rising, wages have remained largely flat so far. However, in the near future, it is quite possible that inflation could also steady following the relatively sideways range. That has been maintained in the GBPUSD exchange rate, which could give some time for wages to rise.
BoE’s next meeting will be a non-event?
The Bank of England’s next meeting is due on March 16th, 2017. Until then, the central bank will be looking at only the February’s jobs report. This data could potentially mean that the BoE’s next meeting will be a non-event at best. Unless the exchange rate see’s another significant wave of volatility.
Last week, the British pound came under pressure early into the week. As reports emerged that Scotland was preparing to hold another independence referendum. Which if followed though could seriously weaken the British pound even further on account of uncertainty.
About the contributor
The article, about the new BoE deputy governor Hogg rate hike prospects, was written by John Benjamin. An analyst from Orbex – an AtoZ Approved Forex Broker.