Bank of England hawks and doves face off! Greene calls for hiking interest rates as soon as possible, but Bailey says "no rush".

Bank of England policy maker Megan Green said that with ongoing conflicts in the Middle East, the case for raising interest rates is strengthening. This suggests that more officials may join Bank of England Chief Economist Huw Pill in calling for action to curb inflation in the future. As one of the most hawkish officials at the Bank of England, Green stated that it may be necessary to raise borrowing costs quickly to prevent inflation expectations from getting out of control. She emphasized that when dealing with the threat of inflation, the speed of action is equally as important as the magnitude of interest rate hikes. Green stated during a speech at Derby University Business School, "I believe that with the conflict ongoing, the case for raising interest rates is strengthening. I think tightening monetary policy in the coming weeks or months may be necessary." The Bank of England's Monetary Policy Committee (MPC) will announce its next rate decision on June 18. While only Pill supported an immediate rate hike in April this year, multiple officials including Green have indicated that they would consider supporting a rate hike if the war continues. Reports suggest that the U.S. and Iran are nearing an agreement, but this agreement is unlikely to bring a permanent solution to the conflict. Additionally, the damaged energy infrastructure in the Middle East will take time to rebuild, delaying the full recovery of oil and gas supplies. Meanwhile, as household and business energy bills rise, UK inflation is expected to approach 4% later this year. The money market currently fully expects the Bank of England to raise rates by 25 basis points in September, with an 85% probability of another rate hike before the end of the year. Bank of England warns of the risk of a second round of inflation effects Green stated, "Even if the war ends today, even if the Strait of Hormuz reopens fully immediately, the macro-economy will continue to be affected for the next year." She suggested that the second-round effects of inflation could range from a relatively mild situation similar to the energy price surge in 2011 to the natural gas crisis after the Russia-Ukraine conflict in 2022. Green added that it is more likely that businesses will pass on higher costs to consumers rather than workers demanding higher wages to offset the losses from high inflation. It is worth noting that Green had previously warned last month that the risk of inflation was tilted entirely to the upside. She stated that it is worth waiting to see the progress of the Middle East war before deciding on raising rates, but emphasized that the risk of upward inflation is forming a "cog effect" - with the risk of energy prices and second-round effects leaning upwards rather than downwards. Green pointed out that the UK's weakened economy and loose labor market should limit the second-round price effects of the global energy shock, but she admitted that progress made by the UK in combating inflation before the conflict erupted had stagnated. She said, "We are facing a negative supply shock, an energy shock that will drive inflation higher and drag on growth, which is a very bad situation for the central bank." Green had voted with the majority of the eight members in April to maintain rates. She stated that the Bank of England should not rely on financial markets tightening the financial environment to "do the work for us." However, Green's comments stand in stark contrast to Bank of England Governor Andrew Bailey. Just as Green's speech was released, Bailey was appearing at the House of Lords Economic Affairs Committee. Bailey said, "I think we do actually have some time, especially as effectively our policy has already tightened." Bailey hinted that he was not in a rush to raise rates immediately, particularly in a situation where energy shocks were causing the outlook for demand to be more fragile. This suggests that the Bank of England's Monetary Policy Committee may soon be split back into the two major camps that existed before the outbreak of the Middle East conflict. The focus of the debate then was on the speed of rate cuts, while officials are now balancing how to curb soaring inflation while supporting the weak UK economy. In addition to Bailey, Bank of England Monetary Policy Committee member Alan Taylor also stated that the UK only truly needs to raise rates in the most pessimistic scenario of the Middle East situation. He also warned that the conflict in the Middle East was increasing the risk of the UK economy falling into recession. He pointed out that the UK labor market is currently weak, suppressing price pressures, so the risk of a "wage-inflation spiral" similar to 2022 is relatively low. Taylor, who voted in April to maintain rates, said, "The UK economy is currently very weak and facing an inflationary supply shock, which makes our balancing act very complex. Given that monetary policy is already quite restrictive, we don't need to react too aggressively." Bailey also warned that the UK economy is facing a dual challenge of aging population and an increasing number of young people neither working nor in education. He said, "If we have both aging of the population and a decline in labor participation among the younger people, then it's even more concerning." "If those two things happen together, I think that's a very, very significant issue, a very, very serious issue." More than 1 million young people in the UK are neither working nor studying As Bailey made the above remarks, concerns are growing within the UK government that the number of NEETs (young people not in education, employment, or training) has surpassed 1 million for the first time in over a decade. Market concerns are that youth unemployment issues may have long-term negative effects on young people's careers, drag down economic growth and tax revenues, and further increase already high social welfare spending. Last week, a government-commissioned review chaired by former Health Secretary Alan Milburn warned that the UK is facing the risk of creating a "lost generation". The government is currently trying to understand the underlying causes of this crisis. Furthermore, at another event on Tuesday, Bank of England monetary policy maker Swati Dingra stated that as global trade tensions escalate, the UK will have to move closer to the European Union in the future. She said at an event, "Usually, in times of trade wars, if you are a medium-sized economy, you have to choose a closer relationship with a larger economic partner." "In my view, in the current environment, who is the most reliable trading partner? The EU is clearly the most hopeful choice."