The Bank of England's governor, Andrew Bailey, has stated in recent trade that the Old Lady will have to act with rates if there is evidence of higher inflation expectations feeding into wages.
Bailey is essentially echoing his recent message about the direction of monetary policy which last week led to a jolt in financial markets.
"What we're concerned about … is once you start to get an increase in inflation of this sort we want to stop it becoming generalised in the economy," Bailey said during an online question-and-answer session organised by the BoE on Monday, as noted by Reuters.
''Bailey said there was a risk of more bottlenecks in the economy, especially in demand for labour which could fuel expectations of higher inflation.''
"And that's why we would, and will, have to act on interest rates if we see that evidence becoming clear," he said.
Key comments from BoE's Bailey
Says much of rise in inflation has to do with reopening after lockdowns.
Says what we are concerned about is once we have an increase in inflation we want to stop it from becoming generalised.
Says problem now is that what's pushing up inflation is not too much demand.
Says the risk is that we are going to get more bottlenecks, especially for labour.
Says we would and will have to act with rates if we see evidence of higher inflation expectations feeding into wages.
Market implications
These comments are a follow-up from last week's meeting which left traders on the wrong foot. The central bank surprised markets when it did not raise interest rates. The BoE has been criticised for misleading the markets as it held its benchmark steady in little more than two weeks after Bailey said the BoE would have to act to contain inflation expectations.
Consequently, GBP crosses have been pressured. GBP/USD fell from the 1.37s to test the lower boundaries of 1.3400:
