McDonald’s Corp. has just raised the price of a cheeseburger in its UK restaurants for the first time in 14 years, by 20% to £1.19 ($1.43) from 99 pence. Something must be done.
The Bank of England needs a Big Mac and fries
However, for all major central banks, life is about to get much more complicated. One-handed economists are indeed rare beasts, and many would rather have more than two hands presently to explain the divisive macroeconomic backdrop. Creeping inflation, faltering economic growth and the risk that Russia will cut off much of Europe’s energy supply are forcing central banks to make policy decisions under rather grim conditions.
This explains why central banks are tossing forward guidance into the lexicographic graveyard that has already absorbed transient inflation. Data dependency is the new mantra; establishing a specified interest rate path should really only be for times of emergency, and recent press leaks from the ECB and the Fed show that expected decisions are changed just before official meetings in response to the rapidly changing data.
The BOE should limit itself to a single double move in this rate cycle before returning to its standard quarter-point increment. And there may not be many more either; if the monetary policy committee rises to 1.75% this week, it will be closer to the likely peak of around 2.5%.
More details are also likely on the central bank‘s approach to reducing its £866bn quantitative easing portfolio. Since March, the BOE has stopped reinvesting maturing debt, but the extra step of actively selling off its gilt holdings will likely double the pace of balance sheet reduction to between £50bn and £100bn in the first year, with a decision expected final. in September. It is difficult to assess the combined effect of withdrawing liquidity from QE at the same time as raising interest rates, but it may reduce the level of borrowing costs deemed appropriate to slow inflation.
There will be updated estimates during this week’s quarterly economic review, which should offer a guide to how quickly the BOE expects inflation to return to its 2% target over the next three coming years. Equally important is whether recession is averted. It will be a close call; the International Monetary Fund predicts virtually no growth for the UK next year, although it is not renowned for its accuracy in its forecasts for the UK economy.
Fiscal stimulus is coming, however, as the Conservative leadership campaign turns into a contest over how much and how quickly taxes are to be cut. Even the once frugal ex-Chancellor of the Exchequer Rishi Sunak is now proposing to scrap the 5% sales tax on fuel. Foreign Secretary Liz Truss, the favorite in the race for the post of Prime Minister, is promising a splurge worth nearly £40billion. The MPC will calibrate the adjustment of monetary policy to counter inflationary impulses from more money in payroll packages. With the current cost of living crisis, a very high percentage of all government largesse is going to be spent rather than saved.
As the burger shocker shows, daily expenses continue to rise rapidly for Britons. To prevent inflationary expectations from taking root, it is clear that monetary policy must be tightened. The BOE can now price in rate hikes, to get closer to where the economy will naturally start to slow. He can then relax, knowing he has more leeway to react if and when the tides turn and he needs to stimulate growth again. Still, the chances of the price of a cheeseburger going back to less than a pound anytime soon seem very slim.
More from Bloomberg Opinion:
Fed’s Powell smartly swears on advice, but then distributes some: Jonathan Levin
The Pros and Cons of Liz Truss: Adrian Wooldridge
• Are interest rates neutral? The markets hope so: Mohamed El-Erian
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was Chief Market Strategist for Haitong Securities in London.
More stories like this are available at bloomberg.com/opinion