Bank of EnglandOct 20 2022

Energy price guarantee may push rates higher, BoE says

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Energy price guarantee may push rates higher, BoE says
AP Photo/Alberto Pezzali

In a speech at Imperial College today (October 20), Ben Broadbent said the guarantee, which caps the price at which consumers can be charged per kilowatt hour of energy used, will temper further rises in inflation as long as it is in place.

However, he said, this would also increase domestic spending over the next year, as the immediate pressure on household finances would be relieved.

“At the margin, the task of reducing overall demand growth, in order to bring inflation back to target, would therefore tilt more towards monetary policy,” he said.

“There is less reason to respond to this news in a 'gradual' or 'smoothed' manner.”

Broadbent said the justification for tighter monetary policy is clear.

The justification for tighter policy is clearBen Broadbent, BoE

He said the cause of the recent rise in inflation is a direct result of higher import prices, and inflation should cool as those prices stabilise.

“Domestic inflation tends to be more persistent, however…and reducing it requires the economy to grow below its trend rate for a period of time.”

Because inflation has depressed real incomes, the needed slowing of demand will come as a direct result of the higher import prices.

If the government can mitigate those price rises, as has been done with the energy price guarantee, there is more for monetary policy to do.

“The justification for tighter policy is clear.”

Treasury briefings

Broadbent’s speech came after the deputy governor of financial stability at the central bank said the Treasury did not forewarn it of the contents of the “mini” Budget, which “clearly” contributed to the resulting sell-off in gilts.

Giving evidence to the Treasury committee yesterday (October 19), Jon Cunliffe said the Treasury normally briefs the central bank on the contents of an upcoming budget.

This includes a briefing to the monetary policy committee to allow its members to decide what resulting action to take at the next interest rate setting meeting.

As the statement on September 23 was not deemed a full budget by the government, the normal full briefing did not happen, Cunliffe said.

“We had some briefing from [the Treasury]…on the things they thought [were most important],” he said.

When you look at what happened after the "mini" Budget...there is in my view clearly a UK componentJon Cunliffe

“We did not have a full briefing of the package the night before.”

Mel Stride, chair of the Treasury committee highlighted that the government was keen to stress it was a fiscal event, not a full budget, therefore the process was different.

This included no economic forecast from the Office for Budget Responsibility, which was widely credited as contributing to the negative market reaction.

Cunliffe said the BoE is normally given the OBR costings, which it takes into account in its rate setting meetings.

“Yields had been moving up [generally] against the background of rising rates up until September,” Cunliffe said.

“When you look at what happened after the 23rd [the day of the “mini” Budget], there is in my view clearly a UK component.”

Call in powers

Cunliffe also warned that potential “call in powers” from the regulators could hamper growth in the UK.

City minister Andrew Griffith recently told the Treasury committee that the government was committed to these powers, which would see parliament able to “call in” decisions by the regulators if it was in the public interest to do so.

This could potentially pit the Bank of England against parliament.

Cunliffe said the financial services and markets bill, in which the call-in powers were originally included, then excluded, is welcomed.

The bill repeals EU rules over the financial services industry in the UK and gives the FCA greater responsibility to set requirements for financial servies companies.

“The bill give us flexibility…but that needs to be underpinned by strong regulatory framework and independent regulators and that is best practice in most advanced economies,” Cunliffe said.

But any powers to change decisions could result in the UK’s financial services sector being eschewed by foreign companies, he said.

“Other jurisdictions will not be assured that their firms can use our financial infrastructure and services unless they are assured that our framework is credible and they are not importing risk into their jurisdictions.”

sally.hickey@ft.com