Investors were already on tenterhooks about any further outlook for inflation, so it was almost inevitable that a hawkish speech from a Bank of England policy maker, became words which moved markets, albeit briefly.
Pound Rises And The FTSE 100 Falls
The pound rose sharply before falling back slightly, and the FTSE 100 also fell after Michael Saunders, a member of the monetary policy committee flagged a raft of warning signs indicating that the trends fuelling prices rises may not be temporary. He’s forecasting that inflation could stay above the target of 2% for 2-3 years if the tools are not tinkered with.
Staff shortages and fewer redundancies combined with rising manufacturing and services prices and the expectation of stronger growth are all feeding through to his view that there is less slack in the economy than previously thought.
He’s advocating a tighter stance on monetary policy and starting the withdrawal from the drug of cheap money sooner than previously forecast. This would mean ending the current asset purchases programme in the next month or two, before the full £150 billion has been purchased, with potentially a further squeeze next year.
The fact he is not a lone voice on the MPC to argue for tightening of policy, is likely to be why there has been market reaction. Sir Dave Ramsden also indicated an easing off of easy money might be needed sooner rather than later, following the jump in CPI inflation to 2.5% on Wednesday.
Whether they will stay just a duet with the rest of the MPC singing to a different song when they next meet in August is not clear, nor are their exact voting intentions but the dissent is nevertheless adding speculation that inflation is going to linger for longer under current conditions.