A monetary hawk (or hawk for short) describes someone who places keeping inflation low as the top priority in monetary policy. In contrast, a dove emphasizes other issues, such as low unemployment, wage growth and economic growth over low inflation.
Doves generally are more in favour of expansionary monetary policy, including low interest rates while hawks tend to favour ‘tight’ monetary policy - i.e. raising rates to keep a lid on inflation.
According to the FT, a strong body of opinion in the central bank, which includes the governor Mark Carney, believe that the UK economy is becoming more vulnerable to inflation, meaning even a small improvement in the Bank’s growth forecast would require higher interest rates to stave off rising prices.
But here’s the rub: while the Bank of England policymakers are turning more hawkish, investors aren’t listening. In fact, the market believes there is a scant chance of rates moving upwards before 2019 given weak growth, paltry wage growth and worries over a ‘cliff edge’ scenario in the Brexit negotiations.
Meanwhile this Thursday when the Monetary Policy Committee (MPC) announces its latest decision on monetary policy, bank officials are expected to argue that the case for rate rises to tame price rises will have strengthened since the last MPC meeting, thanks to the fall in sterling. The weak pound is likely to increase the cost of imports and push inflation higher in the months ahead.
It could be argued that the Bank of England policymakers are suffering from a bit of crying wolf - despite warnings of rate rises, few members have actually voted in favour of a rate rise. Last month, Andy Haldane, the Bank of England’s chief economist, failed to follow through with his suggestion that he was about to vote for a rate rise.
Economists argue that the Bank’s repeated warnings will keep failing to get people to prepare for a rate rise, unless more MPC members start voting for hikes.
It’s now almost a decade since the Bank of England first took the knife to rates. And despite talk about a rate hike being around the corner, the only move in rates has been in the opposite direction - in August last year with Britain still reeling from the Brexit vote and worries about the long-term outlook for the economy, policymakers cut the base rate by another quarter per cent to a new all-time low of 0.25%.
But is the tide now finally turning? Will the Bank’s policymakers and markets lock horns over the future path of official interest rates? Are we being too complacent that rates will remain at the emergency level 0.25% until the end of 2018 and will not rise above 0.5% until 2021?
Last month, the committee’s message was that interest rates would probably have to rise, and by more than markets were pricing in. However, there seemed little urgency to tighten, at least outside the small group that favoured a hike.
How much might this change come Thursday? Well, the economic data paints a mixed picture. While manufacturing numbers look stronger, construction figures have dipped. The jobs market continues to improve, but while unemployment is at a record low, pay growth remains subdued. Global growth prospects remain solid, although geopolitical risks have returned to the fore, thanks in large part to North Korean sabre-rattling.
But let’s focus on the thorny issue of inflation, which arguably will be the driving force behind any rate rise. In July, inflation was unchanged at 2.6%, consistent with the Bank’s expectations.
Tomorrow’s CPI figures will no doubt provide further insight into the future direction of price rises, but it’s worth noting the views of fixed income investors Ian Spreadbury and Sajiv Vaid, who manage the Fidelity MoneyBuilder Income Fund.
They expect any pick-up in inflation to be fleeting due to a number of key long-term economic trends. First, an aging population limits the size of the global workforce, which by corollary suppresses economic activity. Then there’s the fact that rising inequality and the growing cohort of self-employed people with limited earning power, such as Uber and Deliveroo drivers in the so-called gig economy, means less money to spend. Less economic activity, and less money to spend, means prices are unlikely to be driven upwards, keeping a lid on inflation over the long term.
Less economic activity and less money to spend means prices are unlikely to be driven upwards. Simply put: central banks in the developed world can print money, what they can’t do is print people.
But with low inflation and tepid economic growth, they’re unlikely to turn off the taps of monetary stimulus. So despite the hawkish crows, the doves should continue to rule the roost. That’s good news for borrowers, bad news for those leaving their money languishing in cash and even more reason to stick with a seasoned fund manager who can roll up their sleeves and use the resources and insight at their disposal to unlock those ever elusive returns.
Maike Currie is an investment director at Fidelity International and the author of The Search for Income – an investor’s guide to income-paying investments. She acts as a spokesperson and commentator on investments and consumer finance with a special focus on income, interest rates and inflation. Prior to joining Fidelity, Maike worked as a financial journalist across a number of titles in the Financial Times Group. She continues to write a regular column for the FT.