Rise of the Bank of England: it was the labor market that worried them


Reading yesterday’s BoE statement, the following points are obvious

  • BoE is largely convinced Omicron can be managed, but December 2021 and Q1 2022 set to decline
  • Inflation is now expected to peak at 6% in April 2022. Previously, it was 5%.
  • The BoE recalls that it is concerned about price stability and that the inflation target of 2% remains
  • The job market is what worries them. See this paragraph at the end of the statement:

At its November meeting, the Committee considered that, subject to the incoming data, in particular on the labor market, being broadly in line with the central projections of the November Monetary Policy Report, it would be necessary in the next few years months to increase the key rate in order to bring CPI inflation down to the 2% target on a lasting basis. Recent economic developments suggest that these conditions are met. The labor market is tight and has continued to tighten, and there are some signs of further pressure on domestic prices and costs. While the Omicron variant is likely to weigh on activity in the near term, its impact on inflationary pressures in the medium term is unclear at this point.

The Committee considers that an increase in the discount rate of 0.15 percentage point is justified at this meeting.

Take-out

Everything about labor market inflation. So in the future, watch the sensitivity of the GBP to the labor market. If wages go up then costs go up then inflation is systemic no matter how you got there. The BoE will not take this risk.


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