- Prior 3.75%
- Bank rate vote 0-8-1 vs 0-8-1 expected (Pill voted to raise bank rate by 25 bps)
- Reasonable to hold bank rate at 3.75% given UK economic situation and Middle East uncertainty
- CPI likely to be higher this year as effect of higher energy prices passes through
- Our job is to make sure inflation gets back to 2% after initial impact of the war has passed
- There is a risk of material second-round effects from inflation
- Policy setting would need to lean against this
- Weaker economy, labour market, and tighter financial conditions will help reduce inflation over time
- Monetary policy cannot affect global energy prices, and should generally look through the initial impact on inflation
- Risk of second-round effects would depend partly on how long energy prices remained elevated
- Members broadly agreed that any second-round effects were likely to materialise more quickly via pricing channels than wage-setting
- While there were likely to be some second-round effects, continued weakness in activity would limit the strength of these
- Full statement
It’s nothing overly hawkish and if anything else, it’s more of a realistic take by the BOE. One key line that I admire is the central bank outright stating that monetary policy cannot resolve what is happening with higher energy prices right now. And the only thing they can do is to respond to potential second-round effects.
In essence, the statement affirms that they should wait to see how inflation developments will change based on the Middle East situation. That is fair, although some policymakers would feel the need to take proactive action against the circumstances in play. And they also highlight that here:
“Some members might prefer to act early as insurance against risks to inflation persistence. Others might prefer to see more conclusive evidence of inflation persistence before acting. Such an approach might avoid unduly weighing on activity, or the risk of a subsequent policy reversal.”
If anything, I would applaud the communication here in being clear about everything. It is exactly the points that I raised in my post earlier this week here.
Overall, it’s a balanced approach and a more prudent/cautious take by the BOE. No major hawkish tilt as they look to favour optionality more than rushing a decision.
Coming into the meeting, traders were pricing in ~70% odds for a rate hike in June with the first full 25 bps rate hike priced for July. As for the year, traders were pricing in ~70 bps of rate hikes by the time we get to the final December meeting.
Now, we’re seeing ~50% odds for a rate hike in June with July still pinned for the first full 25 bps rate hike. But by year-end, we’re only seeing ~61 bps of rate hikes priced in.
This article was written by Justin Low at investinglive.com.
