Bailey justifies BOE stance, says inflation risks are two-sided

Bloomberg

UK economic activity is slowing and supply-side issues are stoking prices, underlining the “two-sided” debate over inflation, Bank of England (BOE) Governor Andrew Bailey said.
Reinforcing comments from Chief Economist Huw Pill, Bailey said it’s not the bank’s job to fix supply chain issues that have hampered economies around the world.
“The proximate cause of many of these inflation issues is on the supply side, and monetary policy isn’t going to solve those directly,” Bailey told the Sunday Times in an interview. “It doesn’t get more gas, more computer chips, more lorry drivers.”
Speaking the same month as the central bank stunned many investors by leaving borrowing costs on hold and less than a week after he’d addressed the Treasury Committee in London, Bailey sought to explain that his views were “entirely consistent” with what he had communicated previously.
Bailey acknowledged that the bank had underestimated inflation due to the unprecedented spike in gas prices, and noted that the tight labour market could potentially drive wages higher. Inflation accelerated to 4.2% in October, the highest in a decade and more than double the bank’s target.
“If the economy evolves in the way the forecasts and reports suggest, we’ll have to raise rates,” he said. “Which, by the way, is entirely consistent with what I said in October.”
Meanwhile, investors are at odds on how to trade UK markets as they question just how much the Bank of England will hike interest rates next year.
That’s leading money managers at Goldman Sachs Asset Management and Allianz Global Investors to bet against the pound, in opposition to State Street Corp., which thinks the currency looks cheap and worth buying on dips given the chances for
policy tightening.
For all their disagreement, they still expect fewer hikes than the multiple moves seen by money markets, following a surprise pause by the BOE this month. While policy dilemmas are being faced by central banks around the world, trying to avoid imperiling a recovery from the pandemic, the BOE is dealing with fresh Brexit trade concerns and labour shortages thrown into the mix.