MNI: BOE Hikes 50bp; Further Action If Price Pressures Persist

The Bank of England Monetary Policy Committee voted for a 50 basis point hike at its February meeting, lifting Bank Rate to 4.0% and softened its guidance on future hikes, removing the reference to taking "forceful" action if need be in future.

Bank economists carried out an extensive review of the economy's supply side. cutting the estimate of potential supply growth to close to, but under, 1% over the three year forecast period compared to its most recent estimate of 1.5%, suggesting that the economy would have to grow below 1% to avoid generating inflationary pressure.

TWO DISSENTERS

The MPC split seven-to-two in support of the 50 bps hike with Swati Dhingra and Silvana Tenreyro voting for no change. They argued that there were continuing signs of the economic downturn hitting the labour market and they noted that the full effect of previous rate hikes was yet to come through.

The new policy guidance made clear that any further hikes would be data dependent, leaving the door open to rates peaking at or close to 4%.

"If there were to be evidence of more persistent pressures then further tightening in monetary policy would be required," the MPC stated, rather than using its previous formulation warning of "forceful" action if necessary.

The majority who backed the 50 bps hike cited continued tightness in the labour market and  elevated inflation expectations, which created a clear upside skew to the inflation projections in the quarterly Monetary Policy Report (MPR).

The target inflation measure, CPI, was forecast to fall steeply from 9.73% in the first quarter of 2023 to 0.95% in  the first quarter of 2025 and just 0.37% three years ahead on market rates, although up from 0.02% three years out in the previous forecast from the November round. 

LABOUR MARKET STOCK TAKE

The labour market stock take, the first since November 2021, highlighted how a string of economic shocks, from Brexit, the pandemic and high energy prices, may well hit potential growth.

The MPC estimated that UK potential supply, at around 2.5% pre-Global Financial Crisis and 1.5% since was now down to "almost 1%" in the three year forecast with potential productivity growth just 0.7% over the 2023-25 period. The MPR noted the key factor was "very weak potential labour supply growth" with the UK's participation rate bucking the trend in advanced and declining post Covid re-opening.

The MPR concluded that many of the people who have left the labour force, due to ill health and early retirement, appeared unlikely to return soon with population ageing the most important factor.

The MPC did, however, raise its growth forecast to show a shallower recession with GDP expected to fall 0.5% in 2023 and by 0.25% in 2024  before expanding by 0.25% in 2025.