00:00:32 · Andrew Bailey, Francine Lacqua
[00:00:32] S1: When we talk to markets and when we do a survey of markets for every time we meet, we ask them explicitly a question which tries to, in a sense, get under the lid of this thing and basically tries to split out what is their sort of, if you like, their sort of central expectation of what they think we will do and then compare that with how they're pricing. And we sort of tend to regard the difference between those two numbers as the risk premium. I mean, it's an imprecise science, but that's... What we get back is, broadly, they think probably there's another one in there. I'm not endorsing that, by the way, just to be really clear, but that's what they think. And so there is then a risk premium, which, to your numbers, would explain the rest. Now, I don't think that's surprising or implausible, because we're living in a hugely uncertain time, so the fact that we've got a bigger risk premium which it looks like we have if you sort of do the time series on this thing. Well, you know, is it a surprise given that we're living in these, you know, very unusual, difficult times? [00:01:41] S0: But would you say a second hike is the default option absent the end of the war in Iran?
00:01:41 · Francine Lacqua, Andrew Bailey
[00:01:41] S0: But would you say a second hike is the default option absent the end of the war in Iran? [00:01:46] S1: So to be very clear, I think. It really depends, as you said quite rightly, on what happens to energy prices. And that really depends on what happens in the Middle East and to what extent there is progress on a process to settle this. I think if there's no progress on this, particularly if oil prices come down in the last few days more than gas prices. Gas prices come down a bit, but the oil prices come down more. Let's say we don't see any of this and we have energy prices sort of where they were, then I think, as I said in my contribution to the minutes, I'm afraid I think the second raise is probably more likely than not. But I fervently hope that we're going to continue to see progress on that front and that will get reflected in market pricing. But I'm not going to give you a prediction as to how that will map through because there are lots of other moving parts as I've run this. But I think that really is You're right to say that's really where the action is. [00:02:46] S0: But, Governor, in your mind, you're not waiting for evidence, like a risk judgment is enough for the next hike. [00:02:54] S1: Well, I think there is evidence behind it because I think, you know, the risks are on the upside at the moment, but that could change. And that will change, I think, if we get solid evidence that particularly energy prices are moving in a different direction on a sustained basis.
00:02:54 · Andrew Bailey, Francine Lacqua
[00:02:54] S1: Well, I think there is evidence behind it because I think, you know, the risks are on the upside at the moment, but that could change. And that will change, I think, if we get solid evidence that particularly energy prices are moving in a different direction on a sustained basis. [00:03:11] S0: So you also expect the economy to soften in today's forecast. If it continues to outperform, would that add to the number of hikes that you could do?
00:03:11 · Francine Lacqua, Andrew Bailey
[00:03:11] S0: So you also expect the economy to soften in today's forecast. If it continues to outperform, would that add to the number of hikes that you could do? [00:03:20] S1: Well, I think we'd have to ask the question, why is it outperforming? And what do we draw from that? So I think it's very interesting. It's a really interesting story, actually. We've seen firmer activity in the UK economy this year than we had expected. We're very pleased about that. Obviously, we should be. Everybody should be. It's quite concentrated. if you look at the GDP numbers, it appears that it's more concentrated in the sort of business services sector. On sort of the other way of calculating GDP, business investment has actually been quite strong. That's the stronger element of it. And for the first time, our staff have done some quite novel analysis and said, well, can we actually get under the lid and see what contribution AI may have made to this? And they think about a fifth of it. So for the first time, we can really sort of say, actually, we can see something. And that probably is consistent with, A, the business investment story, because there's capital deepening going on to enable AI, and probably the business services story, because you may say, well, that's one of the sectors where you'd probably see. You wouldn't be surprised if there are leaders in it, actually, particularly.
00:03:20 · Andrew Bailey, Francine Lacqua
[00:03:20] S1: Well, I think we'd have to ask the question, why is it outperforming? And what do we draw from that? So I think it's very interesting. It's a really interesting story, actually. We've seen firmer activity in the UK economy this year than we had expected. We're very pleased about that. Obviously, we should be. Everybody should be. It's quite concentrated. if you look at the GDP numbers, it appears that it's more concentrated in the sort of business services sector. On sort of the other way of calculating GDP, business investment has actually been quite strong. That's the stronger element of it. And for the first time, our staff have done some quite novel analysis and said, well, can we actually get under the lid and see what contribution AI may have made to this? And they think about a fifth of it. So for the first time, we can really sort of say, actually, we can see something. And that probably is consistent with, A, the business investment story, because there's capital deepening going on to enable AI, and probably the business services story, because you may say, well, that's one of the sectors where you'd probably see. You wouldn't be surprised if there are leaders in it, actually, particularly. [00:04:24] S0: But, Governor, I mean, we've heard from some economists that are concerned that actually the rates haven't been restrictive enough, right, compared to some of your analysis, even at the Bank of England.
00:04:24 · Francine Lacqua, Andrew Bailey
[00:04:24] S0: But, Governor, I mean, we've heard from some economists that are concerned that actually the rates haven't been restrictive enough, right, compared to some of your analysis, even at the Bank of England. [00:04:34] S1: Well, what I would say to that is, I think we have to factor in financial conditions. So we were in a different position to a number of other central banks going back a year because we were expected to, and I thought it was a reasonable expectation, that we would cut rates this year. But this is before the conflict started. Obviously, we haven't. I don't think that was any great surprise. That really changed back in March. But that has obviously moved the curve quite a lot. So the best way to look at financial conditions, I think, is to look at mortgage rates in this country. And you look at G7 mortgage rates, the increase in U.K. mortgage rates is one of the highest in the G7. So financial conditions are tightened. And obviously, in terms of the judgment on if and when we should move bank rates, we take financial conditions into consideration because that's what people and companies face. [00:05:19] S0: But let's say there's a peace war with Iran and actually there's lasting peace. Then would rates go down quickly?