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Who will bite first: reality, or the Bank of England?

The Bank of England’s hawkish talk has resonated in markets. Sterling has climbed and the gilt yield curve priced more than one hike between now and the end of 2018. Threadneedle Street has made several such warnings over the past four years. Mark Carney, BoE governor, warned in 2014 that a rise could come “earlier than expected” and the following year that it was “moving closer” to a hike. He turned less optimistic in 2016 and this year warned that Brexit uncertainty would hit wages and investment. The Bank rate remains at a record low of 0.25 per cent.

Will action follow the Bank’s talk this time around? There are arguments for the bank to act. Britain imports half the goods it consumes, making inflation strongly dependent on exchange rates. A stronger pound would calm retail price inflation, which has risen to over 3 per cent since the EU referendum. Second, it would discourage excess borrowing in the property market and build a policy buffer in case of a future slowdown. Finally, it would buy back some credibility for the Bank itself.

To continue reading, please long on to The Financial Times.

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