MNI: BOE Hikes Rates By 25bp As Upside Risks Crystallise

The Bank of England hiked Bank Rate by 25 basis points to 5.25% at its August meeting, with two of the nine Monetary Policy Committee members voting for 50bp as risks of more persistent inflation pressure started to crystallise.

External MPC members Jonathan Haskel and Catherine Mann both voted for 50bp hikes while Swathi Dhingra argued for unchanged policy, but all internal members wanted 25bp. The MPC left guidance unchanged that it would tighten further in the face of more persistent inflation pressures, and warned that rates "will be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term."

On market rates its modal, or most likely, forecast showed inflation above the 2% target, at 2.82%, in a year's time before falling to 1.65% in two years and 1.46% in three years. Its mean projections were 3.12%, 1.95% and 1.86% respectively.

The difference between the modal and mean forecasts was reduced from May, after the MPC incorporated some upside inflation risks from persistence into its modal projection.

The market forecasts were conditioned on Bank Rate averaging 5.5% through the forecast, well above the level assumed in May, highlighting the increase in underlying inflation pressures.
Service sector inflation of 7.2% in June was 0.5 percentage point higher than the MPC had expected, it said, noting that "some of that increase was expected to persist."

In its Monetary Policy Report, the MPC pointed to signs the labour market was easing, with the vacancies-to-unemployment ratio declining. Still, the market overall was tighter than pre-pandemic and earnings growth was markedly stronger than the MPC had predicted.

The forecast for average weekly earnings was raised to 6% for 2023, from 5%, though left unchanged at 3.5% in 2024.
Unemployment was forecast to rise gently to 4.84% in three years’ time, from 4.04% in the second quarter of this year.

There had been speculation that the Bank would release details of its planned gilt sales programme in August, but the MPC said it would vote on a target for reducing its bond stocks at its September meeting.