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M&G Investments: Why the Bank of England should lead the tightening cycle

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Source: M&G, ONS, 30 June 2021

Hopefully public health restrictions on economic activity will continue to reduce, and the UK economy will be vibrant once again. The Bank of England, like the Fed, has to be aware of the inflation implications of the historic monetary and fiscal interventions that were needed through the Covid years. One unique challenge for the UK central bank is trying to understand the tightness of the UK labour market and its inflationary implications post Brexit.

When you take a look at the broad data the Bank of England will have at the September meeting, they will see not only the tightening labour market data we illustrated above, but a booming housing market, whilst the market implied outlook for future 10 year inflation is towards/at its longer term highs.

Source: HM Land Registry, Registers of Scotland, Land and Property Services Northern Ireland, and Office for National Statistics, 30 June 2021
Source: M&G, Bloomberg, 13 September 2021

Unlike the Fed, the Bank of England does not do talking about talking about talking about, however in a select committee meeting recently the governor simply stated that the committee is evenly split regarding the time to change policy direction. This, and the above data, indicates that the tightening of UK monetary policy is firmly on the agenda. The old lady that is the Bank of England is likely for turning.

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