MNI: BOE MPC Cuts 25 bps With Two Votes For 50bs; Raises R*
MNI (LONDON) - The Bank of England Monetary Policy Committee cut its key policy rate by 25 basis points to 4.5% at its February meeting, as widely expected, but there were two dissents in favour of a 50bps cut, rather than the one analysts had predicted.
The MPC's Catherine Mann, an advocate of rate activism, switched from opposing any cut to backing a 50bps reduction in February, joining Swati Dhingra in the dissenting camp. The other seven members backed a 25bps cut.
The MPC stuck to its guidance pointing to cautious easing, stating that rates "would need to remain restrictive for sufficiently long" until inflation risks had eased further.
INFLATION PEAK HIGHER
The MPC's forecasts in the Monetary Policy Report showed a sharp upward revision to near-term inflation on market rate projections, with the target CPI measure shown peaking at 3.7% in Q3 2025, up from a 2.8% peak previously.
Nevertheless, the minutes showed the MPC collectively was sufficiently confident inflation would drop back to justify easing, with the projections showing it at 2.0% by Q4 2027.
The seven members backing the 25bps cut said that there had been sufficient progress on disinflation in domestic prices and wages to justify the move.
The two members backing a 50bps cut did so for differing reasons. Dhingra took the view that the subdued outlook in demand was consistent with inflation returning sustainably to targer, while Mann argued that an activist approach in cutting Bank Rate would send a clearer signal that, with effective rates having risen, financial conditions would remain appropriate for the UK.
STOCK TAKE
Bank staff completed the annual supply stock-take and estimated that supply growth was just 0.75% a year at present, but that this would rise to 1.5% down the line.
GDP growth was estimate to have fallen by 0.1% in Q4 and was forecast to rise just 0.1% in Q1, with growth pretty much flat since March 2024.
Wage growth was expected to ease to 3.75% by end 2025, 0.5 percentage point higher than previously assumed.
R* NUDGED UP
The MPC's guidance, that policy will remain restrictive, raises a question over where the neutral rate, R*, is. Bank staff looked again at R* and concluded that it had risen somewhat since the Bank last conducted a formal assessment back in August 2018, when its modal estimate was 2.25% nominal.
The MPR said staff work suggested "a modest increase in R* of around 25 to 75 basis points" relative to 2018 , while highlighting the uncertainty around it. At face value this would suggest R* could be as high as 3.0% although the MPC took no collective view on it. The MPC said that the new estimates of R* supported the view that the key policy rate was unlikely to go back to pre-Covid levels.
Wage growth is expected to ease to around 3.75% by the end of 2025, but that estimate was 0.5 percentage points higher than the previous estimate.