1 March 2023 - Falling energy price may stoke inflation

The Bank of England’s Chief Economist Huw Pill spoke yesterday of his belief that the Central Bank may consider slowing the pace of rate hikes in the coming months. He fears that there is a risk of the MPC having an adverse effect on the economy if it continues to hike rates at its current rate. The Bank’s goal is to slow demand sufficiently to lower inflation without going so far that it leads to a contraction in growth. Given that short term interest rates are a blunt instrument with which to try to bring an element of control over the economy, the size of any hike becomes more important the closer rates come to the neutral point at which they are neither accommodative nor restrictive. Having raised rates at every meeting since December 2021, the MPC as a whole are cognisant of the fact that rates are now at, or close to, the neutral point. One of the independent members of the MPC, Catherine Mann also commented yesterday on the state of the economy. She believes that the fall in energy prices may have the effect of stoking inflation, as households will have more disposable income than they had when energy prices were soaring last summer. As households become more comfortable with the level of their energy bills, the temptation is for them to spend on less basic items. There, is however, a fine line due to the fact that households don’t spend their windfall and instead replenish savings, which will also be bad for economic growth. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.