BoE: On hold...for quite some time. Probably

The Bank of England’s Monetary Policy Committee (MPC) voted 6-3 to keep rates on hold at 5.25% (Mann, Greene and Haskel voted to hike 25bps). Expectations had been almost unanimous for a ‘hold’ decision at yesterday's meeting.

They again described the decision as finely balanced between staying on hold or hiking rates. As with many other central banks at the moment, the impression was of a central bank who see themselves on hold for some time while firmly keeping the door open to a further rate hike. Again, similar to the messaging from other central banks, “it is much too early to be thinking about rate cuts” according to Governor Bailey’s opening statement.

Activity data has been weak in the UK of late, but the three voting to hike felt that persistent inflationary pressures justified another hike. They flagged rising household incomes and what they saw as positive forward-looking indicators of activity, a relatively tight labour market and elevated indicators of wage growth and services inflation. Of the six voting to keep rates on hold, they saw “little news in the UK economic data since the previous meeting” but also flagged that Consumer Price Index (CPI) inflation was still expected to decline significantly. That said, even of those voting to keep rates on hold, most suggested that their latest forecasts “indicated that a restrictive monetary policy stance was likely to be warranted for an extended period…” and said that “a further rise in Bank Rate remained a possibility.”

Rates on hold, but guidance changed

Guidance language – as far as it goes – was mostly unchanged, but there was an important addition, highlighted in the quote below, again supporting the idea that they see themselves on hold here for a while: “The MPC would continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation. Monetary policy would need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit. The MPC’s latest projections indicated that monetary policy was likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”

So – this sounds consistent with an endorsement of the ‘Tabletop’ profile for rates espoused by the MPC’s Pill, something consistent with the summer they had highlighted that there were a number of paths for rates that could get inflation back to target. In that sense at least the guidance is a bit clearer than it was in the summer. There were also some telling throwaway references in the press conference to keeping rates on hold here including: “The message is that we are going to have to maintain policy in a restrictive stance as it is…” (my emphasis).

As for the signal coming from their inflation forecasts…using a ‘market profile’ for interest rates (5.1% by end 2024 and 4.5% by end 2025), the MPC again highlighted their mean CPI projection, which has CPI inflation at 2.2% and 1.9% at the two-and three-year horizons respectively – in other words at target. With constant interest rates, inflation gets back to 2% in two years (though the forecast does then fall below 2%). In a very soft sense, they are arguably signalling that the market may not be pricing in a long enough ‘hold’ period. However, during the press conference it was emphasised that there was no particular message for markets in the difference between the constant and market forecasts and that the difference in profile is not big (“they are delivering pretty similar projections”).

More hikes, or next move down?

The MPC still sound like they see a higher risk of a rate hike than a rate cut – for now at least. Bailey was asked a question on this in the press conference. He didn’t answer it directly but did say in response that risks to inflation remain on the upside. In general – as well as three members voting to hike and them describing the decision as finely balanced, it still sounded as if it might not take that much to get them to hike again. First, in general, they gave the impression that they aren’t confident about how restrictive policy is, although they at least think that policy is restrictive. Second, they continue to emphasise labour market data, wage data and services inflation. On the latter, at one point Bailey said that “it is important that services inflation falls steadily over the coming year.” He also pointed out that nominal wage growth remains much higher than would be consistent with the target if it stays at these rates. They also used language in the press conference like “there is a considerable way to go on inflation.”

Growth and Quantitative Tightening prospects

The Bank’s GDP growth forecasts are not quite as downbeat as mine, and they don’t have a recession in the central forecast, but they are nonetheless pretty lacklustre with broadly flat GDP through 2024. They have reduced their GDP forecasts a little, but at the same time have taken a more pessimistic view on the supply side of the economy, helping to explain why their output gap forecasts are unchanged.

They also highlighted that they see no implications for quantitative tightening (QT) from recent movements in bond yields: Ramsden, Deputy Governor for Markets and Banking, said that moves in the long end do not change the context for QT: “We are very keen as we’ve stressed…that we want those operations to be as predictable as possible…”. He said that they’ve set their auction schedule and what gilts they will be selling and that they will be sticking absolutely to that. They also said that they don’t think QT is contributing to higher term premia.

I still worry that domestic inflation pressure will prove strong enough to justify another hike, however, their CPI forecasts for coming few months look higher than mine. Having a further rate hike in my forecast no longer makes sense as a central case. As before, I’d still expect them to be cutting rates by late 2024.  

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