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BoE’s Greene expresses concern that "stance is not restrictive enough"
Wage growth needs to slow further for the Consumer Price Index (CPI) target to be met, Megan Greene, a member of the Bank of England's (BoE) Monetary Policy Committee (MPC), said on Tuesday. She also voiced concern “over [the] BoE estimate of target-consistent pay growth,”.
Describing monetary policy as a source of concern, Greene said its stance “is not restrictive enough,” and noted that “inflation expectations are anchored above norms.”
Greene's main observations:
BoE estimate of pay growth consistent with the target raises concerns
2% inflation is consistent with wage growth of 3%
Meeting the CPI target requires a further slowdown in wage growth
Inflation becomes noticeable to people above 3%
Numerous supply shocks will continue
Insufficiently restrictive policy remains a concern
Expectations for inflation remain anchored above normal levels
Inflation: Common Questions Answered
The increase in the cost of a representative basket of goods and services is measured by inflation. The headline rate is generally reported as a percentage change both month-on-month (MoM) and year-on-year (YoY). By contrast, core inflation strips out more volatile components, including food and fuel, whose prices can move in response to geopolitical developments and seasonal influences. Economists concentrate on this core measure, which is also the rate targeted by central banks. Their mandate is to maintain inflation at a manageable level, typically around 2%.
Changes in the cost of a basket of goods and services over time are tracked by the Consumer Price Index (CPI). The index is generally reported as a percentage change month-on-month (MoM) and year-on-year (YoY). Central banks target core CPI, a measure that removes volatile food and fuel components. A reading above 2% typically leads to higher interest rates, while a fall below 2% tends to bring lower rates. As higher interest rates support a currency, rising inflation generally strengthens it. Falling inflation usually has the reverse effect.
A country's currency tends to appreciate when inflation is high and weaken when inflation is lower, a relationship that may appear counter-intuitive. The explanation lies in the central bank's usual response: raising interest rates to curb stronger price pressures. Those higher rates draw in more international capital from investors seeking attractive returns on their money.
Investors historically sought Gold during periods of high inflation because it retained its value. They still often buy the metal for its safe-haven qualities during severe market turmoil, but this is not usually the case outside such periods. High inflation typically prompts central banks to raise interest rates in an effort to contain it. For Gold, higher rates are a headwind: they raise the opportunity cost of holding the metal rather than an interest-bearing asset or money in a cash deposit account. Conversely, lower inflation tends to support Gold by bringing interest rates down, making the precious metal a more attractive investment alternative.
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