UK and U.S. Central Bankers Indicate Rate Hikes in 2022

Snapshot

Bank of England (BOE) Governor Bailey boosted expectations of higher benchmark interest rates in the UK today by stating that, “If we see signs of rising inflation expectations feeding into wages, we will have to act with rates.” He also noted that much of the recent prices rises were related to reopening after COVID-19 pandemic lockdowns. 

Meanwhile, Federal Open Market Committee (FOMC) Vice-Chair Richard H. Clarida and St. Louis Fed President Bullard each signaled that the U.S. Federal Reserve Bank may raise interest rates by the end of 2022. The FOMC has been divided on the timing of the first interest rate hike and whether it would take place at the end of 2022 or early 2023. 

Despite talk of higher rates from FOMC members, the Dollar index was down -0.29 on the day, while the British pound rose from a low of 1.3454 to peak at 1.3576 today after Bailey’s comments as shown in the graph below. 

15-minute Candlestick chart of GBP/USD showing the rise after Bailey’s comments. Source: TradingView. 

Detail

Speaking at the Brookings Institution in Washington D.C., Clarida cited three conditions for U.S. benchmark interest rate rises. These include growth in the Gross Domestic Product (GDP), improvements in the Unemployment Rate and inflationary pressures. 

Clarida also stated that “if the outlooks for inflation and unemployment I summarized a moment ago turn out to be the actual outcomes realized over the forecast horizon, then I believe that these three necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022.”

In an interview with Fox News, Bullard said the U.S. is in “pretty good shape for economic growth”. He also indicated that GDP is “above pre-pandemic levels so we already fully recovered in that sense from the pandemic and the pandemic isn't even over yet” and stressed that he thinks "we’re looking at a very rapidly expanding economy."  With respect to rate hikes, he now expects “two rate hikes in 2022."

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