Order. Order. Welcome to the Treasury Select Committee on Tuesday, the 8th of September, 2026. We're pleased today to have the Monetary Policy Committee and the Governor of the Bank of England in front of us to discuss the recent rate setting and also just what's going on in the world that's having an impact on the economy. So I'm pleased to welcome, from my left to right, Professor Alan Taylor, who's an external member of the Monetary Policy Committee; the Governor of the Bank of England, Andrew Bailey; the Deputy Governor for Markets and Banking at the Bank of England, Dave Ramsden; and Megan Greene, who's also an external member of the Monetary Policy Committee. So obviously we're going to talk about the rate-setting meeting, but I want to touch on the stuff going on in the world. And talking of the world, we're really pleased to welcome special guests from Queensland today to see us in action. And also I think Mr. Bobby Dean has some guests as well.
Yeah, we had some work experience students in my office as well come to observe, and they'll be writing up your performance.
We'll let you know your score out of 10 later. Yeah. And I should just say we are slightly light on numbers because a number of our colleagues have been promoted into government roles or PPS roles, and we are still waiting—the pace of elections is not fast here. So it's no comment on our witnesses; we're just a bit light on our numbers today. So I wanted to start, if I could, with you, Governor. Obviously, last time you were in front of us, we talked quite a lot about the Strait of Hormuz and the economic repercussions of what's going on there. I mean, this war in Iran is not stopping there. So I really wanted to see if you could just explain how that has had an impact on your thinking, and specifically the difference between crude going through the straits and refined products, and the impact that has, particularly on the second one.
Yes. So that's actually probably one of the developments since we were last here actually as well, so I'll certainly touch on that. Well, as you say, first of all, it's slightly obvious the conflict is still going on, and it is also causing obviously a high level of energy prices and also quite a bit of volatility in energy prices. That volatility is feeding through into financial markets, and nearly all of that volatility you can really trace back to events in the Gulf. I think it's fair to say that we've got higher energy prices; they could be higher still, I would say. A number of things have gone on: the strait obviously remains largely closed—we think some is getting through, but not huge amounts. As I understand, particularly talking to my opposite numbers—I've just been in Basel this weekend, so I've had conversations with them—more use is being made of pipelines in the area to ship it. But as you saw this weekend, even that's a problem in somewhere because the Houthis have attacked the Red Sea area, which is where the Saudi pipeline goes to. There have been emergency stock releases, quite big emergency stock releases, and they've obviously helped. Obviously they can't go on—the current ones run till about November. There's probably some increase in production of oil in some other parts of the world. And then, as you say, the other development has been the so-called crack spread, and that's the refined products pricing. Because I always say to people—well, I speak for myself—we don't actually consume barrels of oil; we consume the products of barrels of oil. And the crack spread is really the wedge between the crude price and the refined products prices, and that spread has increased. That spread is high at the moment. I think one of the reasons for that—and I am going to be very clear, I am not in any sense saying this as a criticism—the Ukrainians of course have been successful in their attacks on Russian refining capacity, and Russia does have quite a concentration of refining capacity. There are always estimates with Russia, but Russia's capacity may be about 60% under its normal capacity, and that is having some effect therefore on the crack spread. There's probably some other things going on, but you're right: quite a bit of the crack spread is actually not to do with the Straits of Hormuz. I think it's important we recognize here that there are other things. So even if there was suddenly some settlement in the strait, you would still probably have the crack spread issue.
Okay. And how much—well, one of the other aspects of this is that with certain refineries having to take on more work, they're running hot. So have you got anyone looking into that, the impact, the potential challenge if maintenance is not being able—
That's a concern. I think that's a concern particularly for US refineries. I think they are working at high levels. There has also been the closure, I think, of one or two refineries in the US, which was planned beforehand. So yes, that's another factor in this which could cause a sustained elevation of the crack spread.
And I was just going to say, on this maintenance point, it is really interesting because if you'd made assumptions that the conflict was going to go along for a certain amount of time, you might postpone maintenance, but you get to a point where you can't postpone. Plus there's the installations. The Houthi attack hit a refinery, a Saudi refinery. So you're seeing those problems of, the longer the conflict goes on, the more complicated it gets, both with the original crude, but then these spreads. Just to give you a fact: crude is up about 51% compared with pre-conflict, but diesel is up 118%, and jet fuel is up 105%. So that gives you an idea of the crude and then the crack spread on top of that. We talked a lot about this in the July MPR; we had chart 1.7 to really draw attention to this.
Okay, because that was really my next question. How much did that affect each of you in your decisions when you were setting the rate at the last meeting? So I'll start with Professor Taylor.
Yeah, I think it's a very uncertain environment. So when I was last here after the February vote, then we'd had inflation coming down, both core and headline, and a sense that we were coming back to target. I think if you just mechanically asked what would April CPI have been without the energy effects, it would have been at target. So those were reasonable expectations, but since then we've seen the energy price moving in a higher corridor. Oil was at 60 to 70; it's been between 70 and 100. As the Governor said, it could have been much worse. Some experts in March were saying 150 could be within the range of possibilities. The market was a bit more relaxed about that, and the curve didn't go that high. Then we had the hostilities calming down in June and possible ceasefire, so we went to the bottom end of the 70 to 100 range. Now we're edging back up. So I think it's very difficult to know what the future of geopolitical events will be. In addition, we're sort of transitioning from that early phase where the release of reserves and certain temporary measures can mitigate price increases. That can't go on forever. But at the same time, we're seeing a shift around the world, probably to firms and households adjusting demand, and other supply responses coming in. So that's a race between temporary measures wearing off and the supply and demand responses kicking in. Which one will win, we don't know. And it's very different, of course, for the refined products, and then again for gas, which is maybe something else we'll come on to, which is so central to the UK electricity price. So it's a very fragile situation for all kinds of reasons. I think that's what we have to watch especially carefully going into the winter when, especially with gas, it's going to be a very delicate situation, and we've seen that price edging up in recent weeks.
Megan Greene, because of course you voted to increase the rates, so was all of this having an impact on your thinking?
It certainly was. Commodity and energy costs have been up and down largely off the back of headlines over the past six months, and so I think we can continue to expect them to be incredibly volatile. It has been six months now, and so that worries me in terms of potential second-round effects down the line. But in the meantime, I can't pretend to have an edge on knowing exactly how this war will play out or exactly how energy prices will evolve accordingly. In my view, we face such incredible uncertainty that it's appropriate to take a risk-management strategy when devising the appropriate monetary policy response. Then I think you're looking at how to minimize your losses. We've done an exercise looking at: let's say you think energy prices are going to be higher and there will be second-round effects, and it turns out actually energy prices fall and there aren't significant second-round effects. What are the implications for inflation if you course-correct versus the inverse of that? It turns out that if you think that you might be in a situation with higher energy costs and more second-round effects and act accordingly and determine actually that's not the case, then you can course-correct. You'll stay on top of inflation, and the cost in terms of the output gap is relatively small. Whereas if you assume the inverse and actually you end up with more second-round effects and higher energy costs, it's hard to get on top of inflation.
And on the second-round effects, I mean there's a challenge because often businesses in particular will have to lock into a price at a certain time. So what timescale are you looking at the impact of this crisis on secondary impacts? Because for some people the energy price will have a quicker impact on their business, but in some cases it will be a very slow turnaround.
That's right. And so I think ultimately we won't have definitive evidence on second-round effects for quite some time. I wouldn't be surprised if we don't have conclusive evidence until next year at some point. But ultimately we have to set monetary policy looking into the future, given the lags with which monetary policy hits the real economy. And so we have to make a judgment now in my view, rather than waiting for actual concrete evidence of second-round effects.
And I'll bring in Dave Ramsden. But when you answer, Dave, one of the other things we've discussed here is fuel. You mentioned the high cost compared with crude of air fuel, but it doesn't seem to have impacted on holidays for British consumers this summer, partly because some hedged over. And perhaps you could give us a flavor of how much impact you think there could be on flights.
Back in July, I voted to leave rates unchanged, and my assessment was really I saw risks pulling in two different directions. I start from a position of thinking that the current stance of policy—which let's not forget, the market curve is significantly above where it was expected to be before the conflict; bank rate was expected, I was certainly expecting to cut bank rate—and so I think of unchanged bank rate as still being consistent with a restrictive policy. But the two sets of risks I was balancing—and this comes directly to the discussion you're just having with Megan—when I look at the kind of domestic position, I think that's relatively benign. I think Megan's right that we're always going to have to make a judgment on second-round effects, but particularly in the labor market, I take quite a lot of assurance from the fact that—this is something we actually talked about when I was last in front of you in December—our assessment of the labor market over the short term and over wages has turned out to be not only relatively accurate, but actually we've been overforecasting wages. So in Q2, our preferred measure, private sector regular wages, came in at 2.8%; pre-conflict we were expecting 3.2. So you've got a relatively benign picture which I'm sanguine about. I'm not saying that won't change, but then overlaid on that—and this was something I emphasized in July—you've got this increasingly complex global picture with a prolonged conflict in the Middle East, other things that we talked about impacting on the products that consumers actually buy, like petrol. And then, as I emphasized in my minutes paragraph, you've got other shocks coming along, for example, extreme weather events. We talked about El Niño in the MPR, but we and a lot of Northern Europe has had a drought; we know that's impacted on yields. Then you've got other factors like AI which are global, which are increasingly having a bearing. So I do see the kind of global inflationary picture as much more of an upside risk relative to that benign domestic picture. So then it comes back, I think, to the interaction between, if the global picture is going to continue to be a worry, is that going to start to impact on the persistence of domestic pressures? My judgment, and why I differed from Megan in policy in July, was that I'm comfortable with the current position on policy, but I'm very conscious of that risk picture.
Just on your point, you're right: we haven't seen the kind of demand effects on travel that you might have expected yet. But I think that is probably because—and we got a lot of reports on that—airfares have not gone up yet.
Is that mainly hedging, or is it that the companies have absorbed?
I would imagine it's a bit of both. But again, that can't go on. You've seen talk of flights being—some companies saying we're going to have to reduce the number of flights in the autumn. That in itself creates scarcity and may put the price up. So we're seeing the economies adjust to this sustained shock. And one thing I just wanted to add in terms of second-round effects, we put in the July MPR our thinking around a monitoring framework. So yes, it's going to be a judgment, but we are trying to see what signal we can take from the indicators we have of what they might tell us about that degree of second-round effect.
Certainly been a turbulent time, as you say, with the weather as well as the war. Mr. Bobby Dean MP.
Yeah, we're getting into the discussion around the judgment and second effects, and I guess I want to get into a bit more detail. You just started to allude to what indicators would start to convince you. I'm keen to pick on Ms. Greene's comments. She sort of made the case that acting sooner and then course-correcting is the better option, and it feels like with the indicators that we might not know until it's already too late. And so what would be the other members of the committee's reaction to Ms. Greene's point there? So, Professor Taylor, if you start about acting sooner and course-correcting is better than waiting for these indicators to emerge and then suddenly feeling like we're caught out too late.
Yeah. So I feel like I have course-corrected, even though it may look like we've done nothing in terms of changing bank rate, in the sense that I'm sort of on the same page as Dave that as of February, when I was last here, I think we were expecting and the market was expecting two, maybe three cuts this year. That wasn't, I don't think, an unrealistic prospect based on the domestic components of inflation that we've talked about, and they've been coming in for 12 to 18 months sort of below forecasts, suggesting that there's this dichotomy between the domestically generated inflation, which is relatively benign, and then the external shocks, which are very much not. So by voting to hold with the majority unanimously in March and staying with that position since then, I view that as an active decision to maintain restrictiveness that Dave spoke about. I think it is there. We can see that the braking has been quite substantial, partly because we've seen the forecast coming in below where we expected. I think there's evidence that we're further above neutral, say compared to the Fed or the ECB or other central banks, because we reduced rates more slowly from their peak. So I think for me, that's putting in some insurance. And for the moment, I think my judgment is that's sufficient. But the monitoring by the bank staff, which is going to focus on things like wages and spillovers from direct and indirect energy effects into other sectors, comparing it to historical evidence—is the response bigger or smaller than we've seen with prior energy shocks?—that'll be very informative for me.
I'd just give you one sort of fact. Mortgage rates are a good illustration of this. So UK mortgage rates now are typically at the moment about 75 basis points, or three-quarters of a percent, higher than they were at the point when the conflict broke out. I think with the possible exception of Japan, although that's a little hard to map, that's the largest increase in mortgage rates in the G7. So that bears out Alan's point that we have seen a tightening of financial conditions. So again, this point about course-correcting, you have to relate it to where you thought you were going, as it were.
Just on the monitoring point, because I think it's a really fair challenge. What we do have is we have our Decision Maker Panel, for example, which tells us both about what they're thinking they're going to do now and what they're planning for a year ahead. Those kind of indicators, we put different weights on them, but these surveys, some of them are forward-looking. Where we have more of a challenge is more on the labor market side, because there most settlements—the vast majority of annual wage settlements in firms don't happen until around the turn of the year. So this conflict started just after the 2026 settlements were finalized, and the 2027 settlements are still to come. While I was giving you what I consider reassuring wage numbers, they're about the here and now; they're not telling you anything about the future. But we have put out very clearly that we've got a framework. The framework is going to be less clear in the signals it gives us, but it will enable us, I think, to make informed judgments about whether wages, prices—we're beginning to see those second-round effects more pervasive. That will inform all of our judgments. But Megan and I just have a different perspective on that, but we're looking at the same assessment.
I wanted to come back to you because I just flicked through the papers and I saw your history of voting. You wanted to hold at other times when other members on the panel wanted to cut. So is this about sharing perhaps a similar analysis about the risks to second-round effects, but having a different starting position, a different perspective of what the neutral rate might be? Is that a fair explanation of your position versus other members?
Yeah. So I don't want to speak for my colleagues, but I don't think any of us think we should wait until we have definitive evidence of second-round effects to act. I think we all know that that would be too late. But I do think we have a different perspective about our starting point. Whereas some of my colleagues felt reassured that the disinflationary process was underway at a pace that was acceptable to them, I was more worried about it. If you look at our agents' pay settlements, for example, pay settlements will be a bit lower based on what our agents are telling us this year relative to last year. Given that we expect inflation to accelerate, I think it could turn out that they're not that much lower next year, though it's too early to say, of course. But that would suggest that the disinflationary process on wages, at least, is stalling out. I've been worried about inflation expectations, which before this conflict hit were at the absolute top of the band you could possibly explain using historical relationships between inflation outturns and inflation expectations. So that concerned me in light of the fact that we've had two major supply shocks hit the economy, and now this is the third one. We've done a lot of analysis looking at sensitivity to inflation, and if inflation gets above a certain threshold, households and businesses tend to notice it more, and that informs their inflation expectation setting. I think we'll be in that threshold this year, possibly part of next year. So that worries me in terms of feeding through into second-round effects as well. So we have different starting points, and I think that that goes a long way to explaining our views on the current conjuncture.
And Governor, could I build on your comments about the market curve and pick up on something you said in the press conference where I believe you said that the market curve is entirely consistent with our view on the economy. For those that haven't seen a market curve that's kind of edging upwards, expecting the rate to go upwards, but you also said in the same press conference, 'Please do not think the Bank of England is edging towards a hike.' Could you bring some clarity to those two seemingly contradictory—but I'm sure not—statements?
Well, I'll try and explain why I don't think they're contradictory. So let's start with the first one. The first one is a conditional statement, which I think is sort of the normal type of statement we make, and it's this—it really reflects the discussion we've just been having, which is the risks, I'm afraid, are on the upside. We made this point very clearly in the report; I think most of us actually had it in our individual paragraphs, I certainly did. And that's really the risks coming from energy prices, because there's really two parts to this discussion already revealed: there's the question of where are energy prices going—hugely uncertain—and then there's this question about the second-round effects and the transmission of those prices into underlying inflation, which as you can see there are different views on. But I'm afraid on the first one, the risks are on the upside. Going back to the first question, we're seeing that. And I have to be honest with you on that: when you look at the market curve, and when you sort of break the market curve down—as we can do because in our so-called MaPS survey, we also ask the market what they think we're going to do and then how that relates to the curve—they've got essentially a risk premium in there, which is the difference between those two things. And I think that's entirely consistent with the view that the risks are, I'm afraid, on the upside here. Now, that's a conditional view, because that's a view that if we get a sort of persistent energy market effect, that's where we will, I'm afraid, be going.
To your second quote, which was the question I got: 'Are you sort of just gradually going towards a rate increase?' That to my mind is putting an unconditional question, which is: are you in fact pursuing a policy which has a rate increase, it's just a question of when? I draw a very sharp distinction between those two things. I'll bring in the question of what Chair Walsh has been saying in the US about forward guidance, because forward guidance, I think, is an attempt to take you from the conditional world to the unconditional world. And I agree with Chair Walsh that I think that's quite dangerous. We make a lot of conditional statements. I sometimes get quite frustrated privately that a lot of them are interpreted as unconditional statements, but they are conditional because the world's uncertain, and that's what we're saying. The first one is saying, look, the risks are to the upside, and that's a distribution of uncertain outcomes. What I want to dispel is the idea that we've really got a secret plan, we know where we're going to go to, so it's unconditional. That's the thing I push back on.
I'd also follow up on your comment about mortgage rates. I think you said they've gone up by the most in the G7. Is there a fear that that's doing some of the work for you at the moment, but that can't hold forever? So at the moment, that kind of tightening is already having an effect in the economy which you might want to try and achieve via increasing bank rate, but that scenario between the real-world effect and your rate setting can't hold forever.
Well, I think first of all, we obviously have to take financial conditions into account in our assessments of the economy, and that's data, as it were. So the tightening of mortgage rates has an impact on financial conditions, and that's a tightening of financial conditions. Obviously that will affect individual families and people, and we take that into consideration. The market is responding, I would say, to looking at all the same things that we're looking at and drawing the conclusion, as we do, that the risks are to the upside, and so they're pricing it in, and that gets reflected through into the mortgage rate. What I would push back on is the idea that therefore we're not doing anything because we're letting them do all the work. That's not the case. The fact is, though, that we're both in a sense responding to the same things, and we have to take it into consideration in financial conditions, which we do.
Thank you very much, Mr. Dean. Harpreet Uppal.
Thank you very much, Chair. Governor, can I take you back to the last bout of inflation after which you commissioned, or the court commissioned, Ben Bernanke to do a review of how your models worked through that. Can you just update the committee on how the review implementation is going, I think under Clare Lombardelli?
Yes. You will see quite a few products and outcomes of the review already in what we're doing. If you look at the minutes, the individual paragraphs—I think he didn't quite recommend that, but he recommended we looked at the communications, and we have done. We've made two important changes, and you have to see those two changes together, and I think they're entirely consistent with the Bernanke review. The first one is to use the individual paragraphs to give people a better sense of where each of us is, what each of us is thinking, and how we've reflected that into our votes. But the second one—and this is really important—is that the collective comments, particularly the statement, we've moved from what we traditionally call best collective judgment to it is now the view of the majority. You have to see these two things as balancing: we're giving more communication in the individual paragraphs, but then we're saying, rather than try to do this collective comms as what I call a sort of a tent that everybody can get into, which unfortunately ends up as an average of everybody, we want to give a clear sense of why the majority decision has come out. And so that's the collective comms; that's a product of the review. The use of scenarios is also a product of the review—still working very much on them actually, because you still realize you can do things differently and sometimes better. The other point I'd make is that the review work, I liken it when I'm talking about it to an iceberg, because what you see is the bit above the water level.
There's a lot more below the water level, and that's all to do with data, with models, with tools, incorporation of AI into our work, for instance. If you look at the total quantum of work, that's the much bigger part. That work is all coming along; it's not particularly put up in lights, but it's really important.
To go back to the communication point that you just touched on, it seemed to many outside observers that we ended up with nine separate statements about why decisions were made. Have you had feedback in terms of that being possibly a little bit confusing in terms of granularity?
One or two people I know have pushed that view, but I've actually had very positive feedback about it, that we are giving a clearer view of the distribution of positions and what stands behind each of our votes. But I just want to emphasize again that you have to balance that with what we've done on the collective comms. I think the collective comms of the past were criticized for being quite contorted, frankly, at times, because of this attempt to get something that everybody could sort of shelter under. And I think it's clearer now.
Professor Taylor, if I may, in your recent speech, you said that the central projection is the baseline. Do you think that the three different scenarios without sort of saying which is the central forecast is an improvement or not?
Well, I think that particular situation was specific to right after the conflict where there was grave uncertainty, and it maybe would have been misleading to do a central forecast. So I don't think that was a particular issue for me. More broadly, I think there are three sort of balancing acts that we have to try to do, and this can be seen in light of the history of central banking. Decades ago, the communication of central banks was opaque, possibly to the point of being almost non-existent. But we moved to central bank independence and inflation targeting in the 1990s. And so then you had delegated institutions that had to communicate well for two reasons: to markets to make it clear what they were doing because it was a change from the past, and also in terms of accountability, explaining to the public, to you like through these meetings or our speeches or now our paragraphs, what decisions we're making and why we're making them. So there's an important change in the quantity of information. Now you can't have too much of a good thing; it's like adding salt to your cooking. You know, maybe one teaspoon is good, but you don't want to add three. But quality of information is also important, and this goes back to the point that the Governor made, for example, forward guidance. What are you saying about the
future? Monetary policy is forward-looking. We're setting with an eye to what's going to happen in a year or 18 months, but you don't want to make the unconditional statement to say this is where we're going. But you do have to communicate a central view on the economy. I think that's our responsibility to try and collectively say what is our central tendency or view of where we're going and what policy must do. That's sort of setting a baseline level. And then I think it's very valuable around that to communicate our reaction function through scenarios or through other devices. But we have to communicate to markets and the public what we would do in the event of other developments. And then the final piece, which I think is very important and is perhaps a reflection of how special the Bank of England is in terms of our constitutional setup here, we have individual accountability. So there is a premium here, if you like, on us being able to express our individual views. I have to explain why I voted how I did to you and to everyone. And that's good and proper. And so there has to be that element there, but we don't want that to crowd out a strong collective view as well. And I think it's striking those three balances that are very important.
It's interesting. I'm sorry.
I was going to say, I mean, just to—by the way, I think this is a very good thing, but this type of hearing is very unusual. If you go to the US Congress, you go to the European Parliament, you go to the Japanese Diet, only I would be here. Now, by the way, I'm really pleased they're here because I get to share the burden. But this is the point. Our system is different in that respect. I think it's a strength. I actually think it's a strength of our system.
Ms. Greene, with the Governor mentioning just now that the new Federal Reserve head, Kevin Warsh, is taking a different stance in terms of communication, do you think there is going to be a sort of increasing difference in style between the communication that we get from yourselves and the communication that we hear from the Fed?
So I think we have a fundamentally different setup at the Bank of England, where there are nine individual members with individual accountability to you as well as the public. And so that breeds an entirely different setup anyhow. So, you know, I think we've started in different places and we'll probably continue in different places in terms of how we communicate and how we're set up.
Could I—I just wanted to come back to this point about the evolution of the use of scenarios, because I think we're all—you know, the world is getting more and more challenging, more and more uncertainty. And that really plays into those Bernanke conclusions that just having a central forecast and really trying to focus everything around it was not helpful. And obviously the COVID pandemic showed that. But the point Alan made around back in April, uncertainty was so great that we decided to publish three scenarios. I think the Canadian central bank, they did something similar with just two, given the trade shock they were facing. But then in July, we've gone back to a baseline forecast and then put scenarios around it to try and help each of us in thinking about how we frame policy. So we've got the baseline forecast. We've got this adverse scenario, which has, you know, a more sustained conflict, higher energy prices for longer, and then we've got a more benign scenario.
And that enables, I think, each of us in our different ways—and back to what Megan was saying, you know, our starting points might differ—to explain ourselves and our votes. But I think you all have to get used to—and Andrew's right, the market, from the kind of feedback I got, there might have been one or two voices saying, "Well, why have you suddenly in April gone to scenarios? You need to help us." So then we have to explain things. And then in July, they note that we've gone back to a baseline forecast. Generally, I mean, yes, there's a lot of commentary, but in terms of market reactions, when you look at how much volatility is being generated by what we do—which would be a measure that we would be uncomfortable about if there was lots of volatility from our comms—but also what they say to us, April and July were both, I would argue, reasonably well-received. And what I mean by that is we got our message across about policy and the risks around policy.
Professor Taylor, do you think that this new approach does give the public a collective view, or do you think it's just this fragmentation? I mean, the FT carried an article quoting critics. And I just want to talk about your opinion.
No, I think we're balancing the collective against the individual. And I think it's very important to be clear on our reaction function. I think credibility comes from saying if certain unexpected events materialize, how will we react? And I think the comms package and the scenarios help us in delivering that message. And the central forecast, there is another piece that says, you know, this is a distribution around some central tendency. We do have a view on how the economy is going to evolve. I think the combination of the reaction function, which expresses differences and deviations in the face of shocks, and the central forecast as well, which is equally important to express a view, that serves the important purpose for me, which is there's a lot of noise in the world, but there's also sometimes additional noise in financial markets. It's our job to subtract noise, not add noise, and I think our comms package is well-designed if it does that.
Thank you, Chair. Can I just move us on to some of the inflationary pressures we're seeing with regard to food in particular? So my constituency is a very rural constituency up in the north of England. It's not arable, but it is livestock. And when I visited actually what is the UK's largest sheep auction, one of the comments that was made to me is that we are seeing an earlier sale of store lambs, which obviously means they're realizing a lower price, but also the pasture hasn't been there and they're eating into winter silage. How are you going about gathering this sort of intelligence, and when do you expect us to feel the impact of those price changes?
Well, we obviously spend a lot of time going around the country ourselves, and we have our agents do. And the agricultural sector is important, as you say, and we're picking up some quite similar comments. We can also obviously observe—we get information on pricing, for instance, from agricultural sources. So I think we're already seeing—I mean, we're seeing lower yields on cereal crops. So winter wheat, spring barley, oats, I think already the yields are down and we're seeing some upward pressure on pricing. And that's really a reflection of UK conditions. Then, as I think David was mentioning earlier, we've got this El Niño issue building up. I think you can look back historically with El Niños and sort of trace them around the world; it's had effects in the past on things like rice and coffee and cocoa and palm oil. So, yeah, that's coming now. Interestingly so far, but don't put too much weight on this, food price inflation has come in under where we thought it would. However, I think unfortunately this is another area where the risks are on the upside. We have built into our forecast stronger food inflation by the end of the year. So we've already got that in, but we will keep having to come back to this with the sort of evidence you have and we're getting as to whether it's consistent with what we've assumed.
And if I can build on that, I think we really had to learn from the experience of 2022, where I think it took the economy a while to understand what the pressures were on food prices going into that summer and then winter coming from energy prices, but then fertilizer and other inputs. And then we can talk about second-round effects and all of that. What's happened this year, as Andrew says, is interesting up to now and has supported inflation perhaps not rising as much, certainly in food, as we might have expected. I think the latest reading for July was about 1.7%. We're expecting food to go up to 3.5% by the end of the year. And the trade bodies have come down a bit. They were originally saying when the conflict started maybe 6% or 7%; they've come down a bit. But you do then have to look at your fertilizer that you've got to buy for next year. You've got to take account of the difficulty you've had with yields this year, as you say, already using up winter silage for feed. And then, as Andrew was saying—and we heard this again when we were in Basel at the weekend; the great thing about the Basel meetings is you get central bank governors from right around the world—the central bank governors from some of the countries more exposed to El Niño now, because with us it will happen with a lag, were talking about the impact on food prices that they're already experiencing. They're some of the biggest producers in the world. So those will feed through to us.
Thank you. And so given the fact that climate change is a reality now, are we now at a point where this volatility, this pressure on food prices and the pressures on supply mean that we're dealing with a chronic inflationary problem?
Well, I'm not an expert in climate science, so I'm not going to—I mean, El Niños do obviously happen. They're not necessarily to do with climate change. This is a big one. I think everybody's saying this is a big one. But again, I'm not sure the link necessarily follows. We've obviously had very hot summers in this country before. I remember 1976, which was a very hot summer. Sadly, I'm that old. But certainly when you look at global food prices, we are seeing more volatility, I would say, in global food prices and have done in recent years. Now, part of that—because if we go back to 2022, that was not to do with climate; that was to do with Ukraine, actually, predominantly. But I think it's the case that whether it's geopolitics or energy—now we're talking about food—we seem to be in a world where there are more shocks and more supply shocks. In the short term, the drought and El Niño will have a supply impact because they will affect production. But then, back to what we were discussing right at the outset, what actually happens to consumer prices, which is after all what we target, will depend on demand.
Obviously food is a necessity, so that really affects the cost of living. But also the incidence of these shocks, because it will depend on is it global or can other areas compensate for it, and then how can demand adjust? If meat prices are very high, for example—you were talking about the lamb auction you were at—does that mean that consumers substitute away to the extent that they can? But this environment of more and more significant supply shocks is more likely to have a ratcheting up in prices than a ratcheting down. We haven't seen many positive supply shocks of late.
Can I just make a simple but important point? I think to see ever-rising inflation, you need to see these shocks get worse and worse and worse every year, all else equal. And so what I think we're looking at is more frequent supply shocks, but that does mean there's just going to be a lot of volatility rather than just ever-rising inflation.
And if I may, just one more. Just talking about very traditional sectors there, but you've looked at the AI boom recently and the pressure that that's exerted on the supply of chips. Where does this factor in just generally in terms of that inflationary pressure?
Well, there's a box in the MPR on the subject. It does, because we are seeing some upward pressure on chip prices. I think the staff have done a bit of modeling on it. I think they've come down about 0.1 on the CPI as a potential effect. But again, we have to watch this, because the whole issue here obviously is the scale of demand for chips and how that evolves. So we're going to have to watch this quite carefully. But, yes, it is having an impact, and it has an impact obviously because it's not just AI, because there are chips in lots of things. So to the extent it affects broader chip prices, that feeds through. But our staff have done work on that, yeah.
Can I just add a quick point on that? One thing that nobody knows how to model is how these different supply issues interact with one another. And so I think that's a big degree of uncertainty for all of us. And so this AI piece might interact with the Iran war piece, which might interact with other supply shocks to create an effect that you can't just model directly.
Thank you. Thank you very much. Chris Coghlan MP.
Chair, I turn now to quantitative tightening. Dave, the estimates of the impact of QT on interest rates have consistently edged up over time. Is that because the actual impact of QT has edged up or because the estimates have changed?
Well, it's fair to say—and look, I think you give the right framing when you say that they've edged up. A year ago, we said that we thought the overall impact was between 15 and 25 basis points. We've gone up to saying it's an impact of 20 to 30 basis points. And remember, that's in the context of an overall increase in yields of about 350 basis points and an overall increase in term premia, which is the bit that we think QT impacts. Because remember, our principles are all about being gradual and predictable, and QT operating in the background, and Bank Rate being our primary tool. So 20 to 30 in the context of a 200 basis point increase in term premia, I would argue, is still very much in the background. Whether it is because another year we've done a bit more QT or our estimations have been refined, I think you're talking about such small amounts that I wouldn't want to say it's one or the other. I mean, the points I've made that it's a very small percentage—you know, somewhere between a sixth and a tenth of the overall impact on term premium. And remember, over that period, QT has amounted to 400 billion pounds; we've gone down from 895 to under 500 billion, so this has been a very significant adjustment.
I've seen some analysis by Bloomberg that apparently the fiscal losses being incurred on QT today currently relate to the QE that happened during the pandemic. And you, of course, if I'm right in saying, voted to curtail the final 150 billion of QE during the pandemic. In hindsight, do you think quantitative easing was the correct policy response to the pandemic given the inflation we're seeing now, or is hindsight a wonderful thing?
Well, look, this committee—I'm not sure you were on it then, but this committee carried out a very extensive inquiry into QE and the start of QT, I think in 2023. And I was asked a very similar question to that one. I think it's fair to say that we were all asked—and Andrew and I did that inquiry with Ben Broadbent, who was then a Deputy Governor—we were all asked what lessons we would learn. The one lesson I would learn is a second-order one. I remain very supportive of having QE as a tool when you're at the zero lower bound and when you're dealing with an economic crisis like we were with COVID. So I obviously can't say if I went back in time would I vote again for the first and second and third rounds, but I'm pretty confident I would, because of what they did to support the economy through a horrendous economic period. However, that third round of QT—QE, thank you; always have to correct the record after this—that third round of QE, if I recall, was 150 billion over 12 months. It was an unusually long period going into 2021. At the outset of that, we didn't even have a vaccine. But with the benefit of hindsight, I would have had a review point for such a long period. We didn't have a review point at the time, so I started to vote against completing it, but I was in a small minority. But the reason I voted against completing it was because I was beginning to worry about inflation. And so it was the first tool available, and then I started to vote, I think it was with Michael Saunders, both to stop QE and to start putting up Bank Rate, but it was only a month or so before the rest of the committee.
Can I just make a rather dull and arithmetic point, sorry about this, but I think it would be true to say, if I remember the analysis, that in cash flow terms there will always be more of the bonds from the last round of QE before you raise interest rates in the portfolio. This point about where's the relative cost, I think that's probably—there will always be more.
I thought you might be interested in coming in. I'm really interested to hear your thoughts on something from 1844, the Bank Charter Act.
Specifically in terms of the accounting treatment on it. In terms of we, of course—well, the Treasury receives the full fiscal benefit or losses from QE and QT, I think as a result of that Act, whereas the Fed and the ECB do not because of different accounting treatments. So therefore, if the government was to change accounting treatments similar to the Fed and the ECB, would that be one way forward on this issue in terms of not having a taxpayer accumulate 20 billion of losses halfway through?
I'll make a point which you may say goes against my interest, but I think it's important in economic terms: this makes no difference at all. First of all, this is all about accounting, but it is also about transparency. That's the point. Because in terms of the taxpayer, let's think about it, the consequence of the 1844 Act—so let's be clear. The 1844 Act, because I hope very few of the public carry around in their head how the 1844 Act works, splits the Bank of England balance sheet into two parts. So there's what we call the Issue Department, which has on it the only liability is banknotes, and they don't bear interest, and the rest of it is what's called the Banking Department. Now, the reason this was done in 1844 was all to do with the gold standard. So that's history. It was a way of actually making the gold standard work because the gold was on the Issue Department to back the notes, because the Bank originally was a commercial bank, actually. But it's persisted. So these days the so-called seigniorage, which is the profit of the note issue—i.e., because every note we've got is effectively an interest-free loan to the Bank of England—because of the way the 1844 Act works, all the profit of the Issue Department is paid directly over to the government, to the Treasury. The only bit that we withhold is the cost of actually printing and issuing banknotes, which is very small compared. So it's about 4 billion pounds a year.
Now, in other central banks, it's all in one balance sheet. So the seigniorage accrues to the profit of the central bank, and then they usually have some process in normal times for deciding what gets paid over. The consequence of that is that—well, let's start with the other central banks, easier that way. I think the other central banks therefore are able to do—well, they do two things actually, but they're able to essentially offset the seigniorage against the cost of the QE/QT. They also do, by the way, a second thing which is a consequence of that, which is that they also book a negative asset. So, in other words, they book the negative cost of the QE/QT because obviously the one-year seigniorage doesn't cover it. They're therefore projecting forwards to say, "For as long as we need to offset this, we'll take seigniorage into the future." Actually, we'd have to change our accounting plan to do that, but they do that. We can't do that because we have got very little income outside seigniorage. Banking Department has a relatively small income. We pay a dividend to the Treasury, but it's about 100 million a year, I think under that. We've only just started resuming that. So now, I say the consequence of that is that we are paying, in a sense, money to the government with one hand, and it's having to come back with another hand. Other central banks don't do that. In economic terms, for the taxpayer, it's the same because obviously—
It is, but the fact is there's a fiscal hit to the taxpayer today from the current year losses.
Well, hang on, but if we didn't pay the seigniorage, there would be a fiscal hit to the taxpayer by not paying the seigniorage. That's my point, because the seigniorage goes into—
Where I'm trying to go with this obviously is the fiscal hit that we as taxpayers are feeling today as a result of it. One potential solution could be taxation to it, other to leave it alone, as I know that—
Let me come back to that. Can I make two other points? First of all, the UK system is more transparent, and there's merit in that. It's honestly quite painful. Other central banks don't have the same debate about this that we do, but it does have the merit of transparency. I find that the seigniorage element, the fact that we're paying quite a substantial sum of money every year to the government, gets lost in all this debate.
That's why it's helpful to have that clarity.
One other point. When we come to this cost, we now present it in a slightly different way, because the government has got a considerable benefit from the fact that it has issued long-term debt at very low interest rates during the zero interest rate period. And UK governments did a very sensible thing: they issued a lot more long-term debt. UK government debt has a longer duration than other G7 countries, but that is a benefit of QE because the yield curve was so flat and so low. So we have started publishing an attempt to say, "Look, let's try and take that into consideration," and basically it comes out flat when you do that.
You and I have discussed this, so I'm just going to—
I thought I'd give the latest numbers, but happy not to. You may be able to answer.
I just want to pick up on my colleague's questions. You mentioned pain, you mentioned that it can be quite politically difficult. We've had you speak this week about populist forces and the impact that could have on independent institutions. And on this accounting issue, the IPPR published a pamphlet recently saying that the banks ought to be taxed for the amount that this is costing, and that sort of thing is out there in the political discourse. What is your view, Governor, on adding to the tax burden of banks?
Well, I'm not going to comment on fiscal policy. I have said in the past that on this question about interest on reserves, I don't agree with not paying interest on reserves. The reserves serve a number of purposes, but of course they are actually the way in which we implement monetary policy. The anchor point in our system is that when the MPC makes a decision on interest rates, the immediate effect is through the interest rate we pay on reserves to the banks, and then it basically passes through, trickles through into the system. So that's important. The other points I've made is this: most of the reserves are held for financial stability purposes, and it's important that banks do hold those reserves. And the other point I would make—and I think this is important, and I'm not making a pejorative point here—if we stopped paying interest on reserves, that would reduce the banks' net interest margins. They would have to pass that through. I mean, the most likely thing is they would pass it through to customers. I'm not saying that in a pejorative sense; I'm saying it in a sort of economic sense.
Okay. Thank you, Mr. Chair. That is what I wanted to ask. Thank you very much.
John Glen.
Yes. Can we turn to the state of the economy, Governor? People in the country will be looking to you to make sense of all the headwinds and look to understand what's going on. Now, the Monetary Policy Report has the Bank's estimate of underlying GDP growth falling to zero in this quarter. The OECD's latest economic outlook gives the largest downgrade of the entire G20 to the UK economy for 2026 to 0.7%. What is likely to happen in the UK economy overall this year? Are we on the verge of a recession?
I don't think so. Interestingly, since we published the report, I would say that the numbers have started coming in a bit stronger, actually. So I would think probably—we're not doing a forecast for this next meeting, but we will do one for the beginning of November—it's looking a little bit stronger actually, I would say, so that's good obviously. We didn't, in any of our scenarios, have a recession in the forecast. So actually activity has been reasonably resilient, I would say. It's weak by historical standards, and I've spoken a number of times on this, and I think it is a very big issue, this question about how we raise the potential growth rates in the country. But if you look in the short term, it hasn't been. Now, it's interesting because obviously there is now pressure particularly on real incomes. One thing I would say—and this applies to both the household sector and to companies—is that balance sheets are in a quite resilient state, actually. We've gone into this with pretty resilient household and corporate balance sheets. The household saving rate has been quite elevated since COVID. And so I think in terms of what we tend to call consumption smoothing—in other words, that they can actually adjust to some of this without having to ratchet back quite as fast as they would otherwise—their balance sheets may well be helping to sustain some slightly stronger degree of consumption that would be true otherwise.
Can I ask you about the sort of underlying prospects of the economy? We've discussed in previous questions the shocks and problems in the Middle East.
In previous monetary policy reports, you've explicitly highlighted the impact of the employer national insurance hike as a factor in suppressing hiring. How should we discern the difference between those external factors, which are often cited by the government, probably all governments, to justify performance, and that underlying situation in terms of the propensity to hire based on the additional costs?
Yes, this is the core question.
Because if there's not that resilience without those external shocks, and that sort of burden is so high, then we're not well set for a private sector-led recovery, are we?
Well, it's interesting. So one of the things I would say—we were talking about second-round inflation effects earlier on, in terms of the strength of the second-round effects. And if, as we are seeing at the moment, they are somewhat softer, if you take the chain of argument through there, one of the things that we're probably seeing therefore is companies are taking a squeeze on their margins. In other words, they're not passing on all the increasing costs through to prices. Now, the question then becomes how much of that can they do, and that will obviously differ from company to company and sector to sector. To the extent that they've got higher labor costs, of course, and to the extent they've already possibly taken some margin pressure on that front as well, then that will obviously affect their overall decisions. Now, if you take that into the labor market, as you were saying, I think what we're seeing is certainly a lower rate of hiring. So the labor market is softening. I would say we've seen that, and I think one of the features of that is a lower rate of hiring. And that's the message certainly I get pretty consistently when we go around the country.
So when you say that, we can see that some age groups particularly, obviously youth unemployment as well.
There is also an argument out there that says that there is greater investment in productive machinery and assets that mean that—we know that there seems to be an unresolved question around is the UK economy becoming more productive, and there's been a shift away from dependency on labor. How would you interpret the data points in this regard?
I think I would say a number of things there. We are seeing some signs of productivity picking up. Interestingly, it's not necessarily in the sectors that you would associate particularly with AI, so I'm not sure that's yet a sort of change.
Service sectors actually, some of them. But it would, of course, be consistent with lower employment, with reducing labor. So, in other words, you could get a mechanical increase in productivity by having fewer people.
Your point about youth unemployment is right. I think this frankly is concerning, and it has risen. Now, it is, of course, one of the things that I'm afraid does follow if firms rein back on hiring, because of course the thing about the young is that they're coming into the labor market so they don't have jobs. So therefore, if people aren't hiring, they will tend to be more affected.
people who are in existing jobs. So those two things would be consistent.
But I mean, just back to this emphasis on resilience that we were talking about earlier. I mean, there does seem to be relatively low hiring, but also certainly compared to some of the fears around, you know, late last year and then into this year with the shock from the Middle East, there's less firing as well. So you're seeing just less turnover in the labor market. But it is the case that when you look at the aggregate GDP number, it's come in as Andrew was saying, I mean, it was 0.4% for Q2, slightly higher than we were expecting. The latest surveys, both on the kind of producer side, you know, in terms of the PMIs—
It's not going to be zero in this—
Well, we'll see what the official—
I mean, we're talking about is it zero or 0.1 or—
No, but there does seem to be a little bit of—I mean, I wouldn't say it was momentum because we're talking about an annual growth rate of 1%—but we're not seeing the real slowdown in underlying growth that we were expecting to see from the Middle East conflict yet. Because, you know, this big shock comes along, households do seem to be smoothing through it. Consumer confidence, it's the highest level it's been since August 2024, so you certainly haven't seen the economy looking as if it's heading towards recession as a result of this shock. But I mean, the key point that—
You haven't seen any signs of accelerating.
No, but then that comes back to Andrew's big point, which—and we published this in our annex table—take real post-tax labor income between '98 and 2007, that averaged 3.3% over that 10 years. The average since the global financial crisis is 1.5%.
And the key driver of living standards is productivity. So the central challenge—I mean, we're talking here about cyclical changes. The underlying challenge, as we talked about numerous times before, is improving productivity on a sustained basis. That does come back to things like investing in capital as well as physical capital as well as human skills and all those kind of things.
Alan Taylor, you look like you're itching.
