Bank of England governor Andrew Bailey has told a conference that Brits are facing a “historic shock to real incomes”. The boss of the UK’s central bank also warned of volatile commodity prices.
So, what do Bailey’s comments actually mean? And should we expect the stock market to fall? Let’s take a look.
[top_pitch]
What did Andrew Bailey say about rising prices?
Speaking at an event on Monday 28 March, Bank of England governor Andrew Bailey told Bruegel, a European-based think tank, that the UK economy is in for a tough time.
At the event, Bailey highlighted the current cost of living crisis. He commented that Brits are heading for a “very large shock to aggregate real income and spending.” Bailey also outlined how rising commodity prices were of particular concern, pointing to Russia’s invasion of Ukraine as something that will put further pressure on the surging cost of energy.
In fact, Bailey suggested that soaring energy prices would mean Brits are set to face the tightest squeeze on their incomes for 50 years. He explained “The shock from energy prices this year will be larger than any single year in the 1970s. The caveat is that the 1970s had a succession of years and we very much hope that would not be the case now. But as a single year, this is a very, very big shock.”
Bailey also said he was concerned about volatile commodity markets caused by the war in Eastern Europe. He said, “Liquidity conditions have deteriorated in many commodity markets, margin costs have risen, which is, of course, a reflection of much higher volatility and risks in these markets.”
What can we learn about the Bank of England governor’s comments?
It’s no secret that the UK is facing a cost of living crisis. However, comments coming from the Bank of England’s governor expressing concern about the situation is something to take note of. That’s because his comments suggest the BoE isn’t entirely confident the UK economy will improve in the near future.
Those studying Bailey’s comments will also recognise that he mentioned rising commodity prices would likely have a “very big” connection to his Bank’s monetary policy. In other words, Bailey suggested rising commodity prices may have to be cooled by higher interest rates. This means the central bank boss is likely to vote in favour of another base rate rise when its Monetary Policy Committee next meets, on Thursday 5 May.
So far in 2022, the Bank of England has upped its base rate twice. In February it was raised from 0.25% to 0.5%. It was then raised from 0.5% to 0.75% earlier this month. Prior to Bailey’s comments on Monday, markets had predicted the Bank of England base rate would hit 2% by February 2023.
[middle_pitch]
Is the stock market likely to fall following Bailey’s comments?
Given Andrew Bailey’s latest comments, it can be argued the base rate is perhaps more likely to rise than stay the same when the UK’s central bank makes its next decision on interest rates.
Generally, higher interest rates are bad for the stock market. This is simply because higher rates increase the cost of borrowing. This can make businesses reluctant to invest, and encourage a more cautious approach to spending. As a result, this can slow growth which can negatively impact share prices.
However, this doesn’t always happen, especially if any rate rises are already expected by markets. For example, the FTSE 100 barely moved when interest rates were last raised on 17 March.
On another note, Bailey’s warning about volatile commodity prices suggests he doesn’t expect prices to fall any time soon. So, if you are invested in commodities, you might expect to see your assets rise in future. However, there’s no certainty about this of course. Remember, as with any type of investing, markets are unpredictable at the best of times.
Are you looking to invest? If so, take a look at The Motley Fool’s top-rated share dealing accounts.
