MNI: BOE Hikes 25 bps Rates, More To Come If Pressures Persist

The Bank of England Monetary Policy Committee delivered the widely expected 25 basis point hike at its May meeting, lifting Bank Rate to 4.5% and it left the door open to more hikes, repeating the line that it would tighten further if there was evidence of more persistent inflation pressures.

The MPC's new quarterly projections showed inflation markedly undershooting the 2.0% target in two and three years's time on the modal, or single most likely, forecast but on the mean forecast, CPI was shown dead on 2.0% in three years, showing that the committee sees inflation risks skewed heavily to the upside.

On the modal, market rates projection CPI was shown at 1.1% in two years time and 1.2% in three years time.

The MPC voted, as expected, by seven-to-two in favour of the 25bps hike with Swati Dhingra and Silvana Tenreyro again voting for no change.

The majority view was that CPI had come in stronger than expected, there had been "repeated surprises about the resilience of demand" and the labour market remained tight. The majority thought that the second round effects on inflation, through wages and domestic prices, that had emerged post Covid could take longer to unwind than they had to appear.

RECORD UPWARD GROWTH REVISION

The forecasts in the quarterly Monetary Policy Report showed a record-breaking upward revision to growth from one forecast round to the next. Primarily because of lower projected energy prices, and some extra government stimulus from the Spring Budget, the MPC eradicated its prediction for a recession and showed soft growth throughout the forecast period.

The MPC is now expecting no negative quarters of GDP ahead, with underlying growth running around 0.2% a quarter. Growth in the 2023 calendar year was forecast at 0.25% on the year, up from -0.5% previously, and in 2024 at 0.75%, up from 0.25%. The total upward revisions to GDP in the three year forecast were 2.25%.

The MPC downplayed the likely hit to the economy from any tightening in financial conditions following the failure of some second-tier US banks and on large Swiss one. The estimate was that the financial shock would knock 0.25 percentage point off US growth but markedly less than this off both euro area and UK growth, with the cost of funding in the UK reverting to levels similar to those in February, before the shocks hit.