Well, I just begin. I don't use the term hawkish hold. It's a hold though, certainly. There are two things that really are the building blocks for me this decision. One is obviously the events in the Gulf and the impact that's having on energy prices. And it's not just the level, it's the volatility. And it's the difficulty of frankly reading, I think, where's all this going to? But obviously, we have got higher energy prices and that will feed through. And then the second thing is exactly that point, which is there's a sort of transmission. So, yes, it's already fed through in the sense the direct effects. So, it's obviously the pump price, for instance, has adjusted. But then we get what we call indirect effects. So, it goes through into things like food and processed food and then it goes through into sort of second-round effects and where it gets embedded more in the economy. And that's the thing that we have to watch very carefully because it's the thing that we can influence. Now, so the first bit, energy prices, yes, we're seeing high prices, we're seeing more volatile prices. On the second part, on the second-round effects, underlying inflation has been below where we expected it to be. Even if you go back to April when we were last here, inflation's come out lower than we thought it would be. So, the signs are that this disinflation that we've been talking about for some time now, a year or two now, it has continued. I think that's the, if you like, that sets the scene for how the energy effects can come through, but it doesn't answer the question because we've yet to see that posture. And obviously, the energy shock is different, but I think we are operating in an environment of underlying disinflation and sort of yet to start with. And I think we're operating with some softening of the labor market. I think we've got a bit of an output gap opening up now. And so that is a conditioning effect. So, that's why I'm quite resistant to term hawkish hold. It's a hold. And I think we've got a lot of uncertainty and we've got to judge these effects as they come through. So, higher energy prices, but then the pass-through question against a background which has been softer going in.
So, in your paragraph, you said that financial conditions have tightened, that these conditions and the upward-sloping yield curve are weighing on nascent inflation. So, given those comments, I want to ask you, is it the upward-sloping curve that keeps inflation on target, in which case you will have to deliver rate rises to validate it, or would that deliver an undershoot of inflation as the forecast suggests?
Well, the thing is that unfortunately, given the volatility of the situation we're in, there's a lot more uncertainty around even what we... Yeah, we have reintroduced the central projection, our baseline projection, call it what you like. But, honestly, it does not have the same probability attached to it as we would normally do. And that's important for sort of in a sense answering... It's a good question, answering your question, and sort of conditioning of that position because I think the best thing to say is, look, there are ways in which this can unfold, yeah, which would undoubtedly, I think, cause us to have to raise rates. But, there are also ways in which it can unfold which will not cause us to have to raise rates. And that's the uncertainty around the pass-through of this effect, how big the effects are going to be, and how they pass through.
And would you hike rates as a sort of insurance hike against those second-round effects even if you haven't seen them yet?
Well, I think the thing with second-round effects is you can't wait for the sort of the final reckoning, as it were, because it's too late. Because they come through over the whole what we tend to call transmission period of monetary policy. So, we always talk about monetary policy taking its effect over, you know, year, two, three years. If you wait that long to get your final tally, as it were, you've waited too long. So, there will come a point when we have to... Well, we have to make that call at every meeting, but I think there'll come a point where that call will become, you know, frankly, very prominent. And we don't at this stage know what that call will be because of the uncertainty.
And shifting gears to the QT process, I mean you previously given a nod to continuing that and we've seen the push up in gilt yields and the cash flows and things. Is there scope for thinking about how things like QT interact with fiscal policy given we do have a reset, we do have a new Prime Minister?
