However, for all major central banks, life gets much more complicated. One-handed economists are rare animals indeed, and many would currently prefer to have more than two hands to explain the contradictory macroeconomic backdrop. Rampant inflation, faltering economic growth and the risk of Russia cutting off much of Europe’s energy supply mean central banks are making policy decisions in rather grim conditions.
That explains why central banks are throwing forward guidance into the lexicographic graveyard that has already absorbed temporary inflation. Data dependency is the new mantra; Setting a fixed rate path should really only be for emergencies, and recent press leaks from both the ECB and the Fed show that expected decisions are being altered just before official meetings in response to rapidly changing data.
The BOE is likely to be limited to a single double-size move this interest rate cycle before returning to its usual quarter-point move. And maybe there aren’t many of those left; If the monetary policy committee rises to 1.75% this week, it will be closer to the likely high of around 2.5%.
More details on the central bank’s approach to reducing its £866 billion quantitative easing portfolio are likely. The BOE has not reinvested maturing debt since March, but the further move to actively sell its Gilt holdings is likely to double the pace of balance sheet shrinking to £50bn-100bn in the first year, with a final decision expected in September. It is difficult to gauge the combined effect of withdrawing QE liquidity while raising interest rates, but it can lower the level of borrowing costs deemed appropriate to curb inflation.
There will be updated estimates in this week’s Quarterly Economic Report which should provide a clue as to how quickly the BOE expects inflation to fall back towards its 2% target over the next three years. Equally important is whether a recession is avoided. It will be close; The International Monetary Fund expects little growth for the UK next year, although it is not known for its accuracy in forecasting the UK economy.
But fiscal stimulus is coming as the Tory leadership’s campaign turns into a competition over how much and how quickly to cut taxes. Even the formerly thrifty ex-finance minister Rishi Sunak is now proposing to abolish the 5 percent sales tax on fuel. Foreign Secretary Liz Truss, the front runner in the race for prime minister, promises a squandering worth nearly £40billion. The MPC will calibrate monetary policy fine-tuning to counteract inflationary impulses through more cash in wage packages. With the current cost of living crisis, a very high percentage of all government spending is spent rather than saved.
As the burger shocker shows, the daily spend for Brits is still rising fast. To prevent inflationary expectations from taking hold, monetary policy obviously needs to be tightened. The BOE can now frontload rate hikes to get closer to the point where the economy will inherently slow. It can then relax, confident that it has more leeway to react when the tide turns and growth needs to be restarted. Still, the chances of a cheeseburger dropping back in price to under a pound anytime soon look mighty slim.
More from the Bloomberg Opinion:
Powell of the US Federal Reserve cleverly renounces the guidelines, but then gives something up: Jonathan Levin
The case for and against Liz Truss: Adrian Wooldridge
• Are interest rates neutral? The markets hope so: Mohamed El-Erian
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was Chief Markets Strategist at Haitong Securities in London.
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