00:00I'm going to go straight to the point because we know the issue is at hand.
00:02We know it's inflation.
00:04Are you considering voting for a hike at the meeting at the end of the month?
00:07So we're about to start our round on Monday and we'll have weeks of discussions and be shown a ton
00:13of research and analysis.
00:14So I can't say what I'm considering voting for at this stage.
00:18I will say that, you know, there are reasons to really worry about the upside inflation risks from the war
00:23in Iran.
00:24And there are reasons to not be so worried.
00:26I mean, the world looks very different and the U.K. economy looks very different now than it did back
00:31in 2022 when we last had this kind of negative supply shock driven by energy.
00:35The labor market's weaker.
00:37There's weaker demand.
00:38Interest rates are higher as well.
00:40For me, the really important question is whether we'll get second round effects or not.
00:44And all these factors I've just mentioned suggest we might not get the same kind of second round effects that
00:48we've had before.
00:49That said, I wasn't totally convinced that, you know, the second round effects from the last shock had totally worn
00:55off from the economy before as well.
00:57How does it how is this different from 2022?
00:59Because inflation expectations seem to be moving quicker, I guess, as households think about 2022.
01:05Yeah.
01:06So this is different from 2022 in part because the labor market is weaker now.
01:11We have slack that's opened up demands much weaker.
01:13And so even if workers go to their employers and say, we want to get paid more, employers might say,
01:18well, I'll just hire the next guy, right?
01:20So it might not feed through.
01:21And also for firms, it's not clear that they have pricing power.
01:25So even if they pay workers more, they might not be able to pass that through in the form of
01:29higher prices.
01:30That said, firms constantly tell me they don't feel they have pricing power.
01:34It might mean that they don't feel they do because if they raise their prices, they'll lose market share.
01:38But if everybody is facing an energy shock, then they might all be able to pass it through.
01:43So that's a big unknown and an important question for me.
01:46Another important difference is we've had 2022.
01:48So to your point, inflation expectations for households have jumped much more at the beginning of this war than they
01:54did at the beginning of the invasion of Ukraine in 2022.
01:58So it does suggest that households are more sensitive to inflation.
02:02We've done a lot of work showing that the threshold at which households notice it has has gotten lower.
02:08And I think we'll probably see inflation in that threshold.
02:11So that's a worry.
02:12So, you know, that's a necessary condition for second round effects, but it's not sufficient.
02:17So what kind of data do you need to see to say, look, I want to vote for a hike?
02:22So unfortunately, we won't have definitive data on whether there are second round effects or not for months.
02:27And if we wait until we see it, then it will be too late.
02:30So for me, I'm looking at inflation expectations.
02:33Certainly, I'm also looking at the pay settlements as they actually come in.
02:37But I'm looking at some forward-looking indicators as well.
02:40So we run a survey of businesses.
02:42We ask them all kinds of questions, but they talk about their year-ahead price expectations and their year-ahead
02:47wage expectations.
02:48And so that will be important, too.
02:50And actually, we've gotten data points from that survey that cover the period of the war.
02:54And so they give a bit of a mixed picture.
02:57So household inflation expectations have jumped a lot.
03:00But year-ahead own price expectations for firms haven't moved that much.
03:04Year-ahead wage expectations for firms haven't moved that much.
03:07So we really do, from the very few data points that we have, PMI data suggests input costs have risen
03:12much more for manufacturing than they did in 2022.
03:15We really have a mixed picture from the data that we have so far.
03:18What about unemployment?
03:19How does the war actually affect what we're expecting in unemployment, which is already a little bit soft?
03:23That's right.
03:24So the labor market has been weakening.
03:26And, you know, a negative supply shock will push down on activity.
03:30And so we are looking for a further weakening in the labor market.
03:34We're particularly looking to see if there are any indications of a nonlinear adjustment in the labor market.
03:39Now, that was already the case before this war, actually, that we were concerned about that.
03:44Going into this, I will say that the labor market's been weakening.
03:47It hasn't been weakening more than we really expected, I don't think.
03:50And also there are signs that the labor market was stabilizing.
03:53So our own indicator for underlying employment growth has been stable.
03:58Vacancies have kind of moved sideways for the past nine months or so.
04:02And so these things indicate that maybe a nonlinear readjustment in the labor market wasn't coming.
04:07This might change that if you have a hit to activity.
04:10So that's something that we're looking at, too.
04:11And it gets to this tradeoff that we're facing between higher inflation and weaker activity, which is something that we're
04:17going to have to manage.
04:18Megan, is there a worry that because we've had multiple shocks to inflation, that actually there's a time where, you
04:23know, inflation expectations get de-anchored?
04:26Yeah, I think there is.
04:27So I'm not worried that inflation expectations will get de-anchored.
04:31And we are committed to hitting our 2% target, which is our mandate.
04:36But I think if you have successive negative supply shocks, you need to think about the interaction of them.
04:42And so I think that the latest inflation expectations print for households is showing because it did jump much more
04:48than in 2022, even though the shock is actually smaller.
04:51And for households, they're somewhat protected for now from the energy shock because of the off-gen price cap.
04:57So they'll really feel it much more from July onwards.
05:00But the fact that inflation expectations have risen so much more really does show that households are, you know, maybe
05:06more sensitive to upside surprises in inflation, which is what a lot of our research shows, too.
05:11I mean, the difficulties, of course, we don't know how much this conflict continues, right, the length of it.
05:16How long does this need to last to actually warrant an interest rate hike?
05:21So it's unclear, and it's not just the length.
05:24It's also kind of the infrastructure damage, how long it takes for oil and gas to come back on the
05:30markets.
05:31I mean, these things are all factors as well.
05:33As things stand now, if the war ended already, there would be pretty significant lags, particularly with gas markets.
05:40And the U.K. is particularly exposed to gas markets, you know, given the pricing of electricity in the U
05:46.K.
05:47So, you know, I think that this can last a while.
05:49It's also worth considering kind of the succession of shocks.
05:52So businesses are really feeling it immediately.
05:54Households are a bit protected for a little while because of the price cap.
05:58We also have fertilizer that comes through the Strait of Hormuz.
06:02And so that can affect a growing season.
06:04So that might actually feed through into food price inflation in six months' time.
06:07So you might have sort of mini waves of inflationary bouts throughout this.
06:12And that's even if the war ends today.
06:14I mean, out of all the countries, the IMF downgraded the U.K. the most.
06:18Does that worry you?
06:20It worries me.
06:21But, you know, I think growth is already fairly weak in the U.K.
06:25That said, the supply side, I think, is really constrained in the U.K. as well.
06:29So that means that, you know, we can only have so much growth without it being inflationary.
06:33It's no surprise that the U.K. and other countries were downgraded in terms of their growth forecasts
06:38and upgraded in terms of their inflation forecast is exactly what you'd expect to see.
06:42I mean, you've seen, you know, market expectations for rate hikes move around a bit.
06:46Are they fair now?
06:48So I haven't looked at the latest.
06:49I have to be honest.
06:51I would say they've moved around.
06:52So they've moved around a lot.
06:54You know, I can't say because we don't know exactly how long this war will last.
06:58But I will say they have moved around a lot.
07:00And some of that reflects kind of market participants and market dynamics.
07:06There were massive consensus trades in the gilt market.
07:08The gilt market is a pretty niche small market, less liquid than some others.
07:12There were a lot of stopouts.
07:14I think that actually explains a lot of the moves.
07:16When you read sell-side research or talk to people in finance, virtually no one has said to me,
07:21we expect you to hike four times, which is what was priced at the very peak.
07:25It's come off of that, which I think is about right.
07:28I ask you about QT, because is it something that, you know, the BOE has or should think about
07:33to basically change QT to east market conditions?
07:37So, I mean, QT is very much running in the background.
07:39And our main tool is the policy tool.
07:42And it is tricky in a negative supply shock.
07:45You know, interest rates are actually at the very heart a demand management tool.
07:48So for this reason, there's this kind of conventional thinking that central banks should always look through negative supply shocks.
07:54And because we've had a few in a row, I think we should probably rethink some of that thinking.
07:59But, you know, the main tool is the policy rate.
08:01Yeah, I mean, there's also, of course, this AI that can change how we look at employment.
08:05And so how much does that complicate what you're, you know, policy setting for the next couple of quarters?
08:11So for the next couple of quarters, probably not a whole lot.
08:14We're looking at AI and the implications of AI quite a lot, both on employment, as you point out, but
08:19also on productivity growth.
08:21So I've talked a lot about negative supply shocks.
08:23This is the one positive supply shock that's coming down the pike.
08:26I think it will be transformative.
08:28The question is over what time period.
08:30And there's some nascent signs that it is affecting the labor market.
08:34You know, in industries that are more exposed to AI have fewer vacancies than others, for example.
08:39And that's in the U.S., but also in the U.K.
08:42You know, so it is affecting it potentially, but it's really just the beginning.
08:46So over the next couple of quarters, I don't think this should have a huge impact.
08:50Over the next couple of years, it's also a question, actually, how much of an impact it should have.
08:54Megan, our most red story on the Bloomberg terminal is, without a surprise,
08:58President Trump threatening to fire Jay Powell if he stays on to the Fed once his term ends as Fed
09:03chair.
09:04Do you worry?
09:04Or how do you think about that?
09:05And do you worry about central bank independence?
09:07Yeah, so, I mean, as a central banker, I always worry about central bank independence.
09:12You know, to our discussion about inflation expectations, if there isn't any central bank independence,
09:16then those could become de-anchored.
09:18And so, really, the currency of a central bank is its credibility.
09:22And I think you need central bank independence to ensure that and to ensure that inflation expectations will remain anchored.
09:29And so I think it is absolutely paramount that we have central bank independence.
09:34So any kind of threat to it is a worry.
09:35But are you surprised the market is looking through any threats?
09:39So, I mean, I think the markets have seen these threats before and have maybe been a bit desensitized to
09:45it.
09:45So we'll see how that unfolds.
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