Financial Conditions Tighten Rapidly and Materially in the UK, Warns Bank of England

The Bank of England’s arch dove has warned that financial conditions have tightened “rapidly and materially” in the UK, a sharp break from the assessment of a fellow rate-setter. Silvana Tenreyro, an external member of the BOE’s nine-member Monetary Policy Committee, said there is a risk that the UK central bank has overtightened and will undershoot its 2 percent inflation target in the medium term.

Growing Divisions at the BOE

The remarks underscore growing divisions at the BOE, which looks at how much further to raise interest rates in its fight against inflation. Tenreyro’s assessment differs from Catherine Mann’s, who said financial conditions are “not much tighter than average.” Mann argued that economic needs have begun to loosen after the BOE’s aggressive hiking cycle.

In slides accompanying her appearance on Friday, Tenreyro said, “policy and financial conditions have tightened rapidly and materially.” The slides said that far tighter policy “worsens” the medium-term inflation undershoot.

The Fastest Increase in Rates and Overall Tightening in the Monetary Policy Committee’s History

“This has been the fastest increase in rates and overall tightening in the Monetary Policy Committee’s history,” Tenreyro said at the event at Columbia University in New York with an official from the US Federal Reserve. “The main risk for the UK is that we have overtightened.” She argued that the hit to UK real wages would weaken demand and cause a loosening labor market, weighing on inflation.

Financial Conditions Have Begun to Loosen Again

Markets are fully pricing in a quarter of a percentage point increase at the next meeting in March and are leaning toward a further half-point rise by September. That would push the BOE’s key lending rate to 1.5 percent, the highest level since the financial crisis.

Related Facts

• The BOE’s arch dove, Silvana Tenreyro, is the only member of the nine-member Monetary Policy Committee to have voted to pause the central bank’s aggressive hiking cycle.
• Catherine Mann argued that suggesting a pivot at this point would prompt a counter-productive loosening in markets.
• Markets are fully pricing in a quarter of a percentage point increase at the next meeting in March and are leaning toward a further half-point rise by September.

Key Takeaway

The Bank of England’s arch dove has warned that financial conditions have tightened “rapidly and materially” in the UK, a sharp break from the assessment of a fellow rate-setter. This has caused a divide in the BOE, with Tenreyro arguing that the BOE has overtightened and will undershoot its 2 percent inflation target in the medium term, while Mann arguing that financial conditions have begun to loosen again after the BOE’s aggressive hiking cycle.

Conclusion

The Bank of England’s arch dove has warned that financial conditions have tightened “rapidly and materially” in the UK, causing a divide in the BOE. This has caused a range in the BOE, with Tenreyro arguing that the BOE has overtightened and will undershoot its 2 percent inflation target in the medium term, while Mann is arguing that financial conditions have begun to loosen again after the BOE’s aggressive hiking cycle. As markets are fully pricing in a quarter of a percentage point increase at the next meeting in March and are leaning toward a further half-point rise by September, it will be interesting to see how the BOE will respond to the conflicting views.