The Bank of England Has a Trump Problem as Iran War Blocks Rate Cuts

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions Saved Articles My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomePMN BusinessThe Bank of England Has a Trump Problem as Iran War Blocks Rate CutsRead between the lines and the Bank of England has a simple message for British workers losing their jobs or homeowners facing high mortgage rates: Blame Donald Trump.Author of the article: You can save this article by registering for free here. Or sign-in if you have an account.9kefrlvc0qdaav}t0svn7psq_media_dl_1.png Bank of England(Bloomberg) — Read between the lines and the Bank of England has a simple message for British workers losing their jobs or homeowners facing high mortgage rates: Blame Donald Trump.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountPolitical sensitivities prevented Governor Andrew Bailey from being quite so direct after the Monetary Policy Committee voted 6-3 to hold rates at 3.75%, but the subtext of his comments and the bank’s new forecasts was clear. There is no problem with domestic inflation but there may be one if the US President continues his war with Iran.As long as that threat persists, the BOE can’t give the UK economy a shot in the arm by cutting rates. Homeowners will have to live with higher interest costs and jobs will be lost.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againEverything hinges on Trump. Should the Middle East conflict persist “it’s likely that we will have to tighten policy to counter inflationary pressures in the UK economy,” Bailey said in prepared comments after the July rate decision. “If the conflict is credibly resolved in the coming months, the path would point to a looser policy stance.”The signs are that inflation within the UK is less of a threat than had been feared, despite higher energy and food prices caused by the war. There has been “a broader slowing in domestic inflationary pressures,” Bailey said. Inflation was 2.6% in June, 0.4 percentage points lower than the BOE forecast in April. Second round effects that would embed those higher prices in the economy appear to be under control as firms take the hit in “reduced margins” rather than passing costs on to already squeezed consumers, the governor added. “Underlying GDP growth is projected to weaken slightly.” Yet the “situation in the Middle East is highly uncertain” and no one knows what will happen next.The BOE’s central forecast assumes the stop-start nature of the conflict over the past six months persists. On that basis, unemployment rises to 5.3% in 2027 from 4.9% currently, the highest level since 2015 and implying 140,000 more people out of work. The forecast is based on rates rising from 3.75% to 4.25% next year and staying there.Were it not for Trump, that rate path would be implausible, Dario Perkins, managing director at TS Lombard, told Bloomberg. The BOE would be cutting rates to 2.75%. “Without the reintensification of this crisis, rates would be headed at least 100 basis points lower,” he said. “We have the tightest monetary policy in the developed world and they are slowly squeezing the life out of the economy.”Peel Hunt Chief Economist Kallum Pickering similarly believes that “we’d have had one or two cuts by now,” had there been no Middle East conflict. “Underlying disinflation, which is visible despite the energy crisis, would have been the prevailing story.”This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.July’s MPC meeting appeared to show the committee bifurcating. Although external member Catherine Mann joined fellow external Megan Greene and chief economist Huw Pill in calling for a rise to 4%, the six doves dug in.Clare Lombardelli, deputy governor for monetary policy, said the vote “wasn’t a close judgment for me,” while Dave Ramsden, deputy governor for markets, and external member Alan Taylor spoke openly of rate cuts. Bailey said “domestic conditions are on balance more benign” for inflation than at the last meeting.“The doves are getting more dovish,” said ING economist James Smith. “There’s more clear water opening up between them and the hawks. And the bar for a rate hike seems to have risen.”Bailey’s resistance to talk about rate rises was telling. “Please do not leave this room thinking the Bank of England is edging towards a hike, because frankly, there’s nothing in what I said, and I think any of us have said, along those lines,” he told reporters at the press conference.Instead, he drew attention to a staff deconstruction of the market curve in the Monetary Policy Report. It showed the vast majority of investors expect rates to remain at 3.75% over the next year. However, they have to include a risk premium given the uncertainty. As a result, market prices suggest there will be at least one quarter point rate hike to 4% by December and 33% chance of another.Bailey said investors were “quite reasonably” requiring a premium to the central case that rates will remain at 3.75% “to compensate for the risk” of higher inflation caused by Trump’s ongoing war. By implication, he was saying it is possible the bank will have to lift rates but that he doesn’t want to. Trump could yet turn the MPC into a committee of reluctant rate risers.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.