MNI: BOE Hikes 25 bps, Some On MPC Think No More May Be Needed

The Bank of England Monetary Policy Committee delivered its expected 25 basis point hike at its May meeting, although the committee was divided over the size of the hike and over whether further tightening was likely to be needed in coming months.

The minutes of the May MPC meeting point to a three way split in opinions. Three members, Jonathan Haskel, Catherine Mann and Michael Saunders all backed a 50 basis point hike while some of the more dovish members dissented from the policy guidance that further tightening may be needed in coming months.

INFLATION ABOVE 10%, THEN PLUNGE

The forecasts showed that on market rates inflation would surge to just over 10% in the fourth quarter 2022, with the peak likely in October when the next round of energy bill rises hits, before the hit to real household incomes kicks in. Inflation in the market rate projection was shown falling to just 1.3% three years out, 0.7 percentage point below the MPC's target, the biggest projected undershoot post financial crisis.

On constant rates, assuming the current 1% Bank Rate and the stock of QE is maintained over the horizon period, inflation is seen just above target at 2.16% in Q2 2025.

The market rate forecasts suggests that the market's rate path, for the policy rate to come peak at 2.6% in 2023, is overblown.

The market path growth forecasts showed the UK economy contracting. Four quarter growth in the first three quarters of 2023 was shown as negative although a technical recession, two consecutive quarters of negative quarter-on-quarter growth, is expected to be avoided. with the only negative quarterly growth a plunge of near 1% in the fourth quarter.

GILT SALES STRATEGY REVIEW

The MPC had stated that once Bank Rate hit 1% it would actively consider gilt sales.

It kicked the can down the road on sales, announcing that it had asked Bank staff to work on a sales strategy and to update the MPC at the August meeting.

On a calendar year basis UK GDP was shown rising 3.75% this year but contracting 0.25% in 2023, down from the previous 2023 forecast for a 1.25% increase. 

OUTLOOK

Against this forecast backdrop the MPC split between those seeing the case for more aggressive tightening sooner, those thinking more tightening was likely to be needed soon and two members questioning whether further tightening was likely at all.

MPC members Jon Cunliffe, who voted against the previous hike, and Silvana Tenreyro would likely be two who were not prepared to sign up to the line that "some further degree of tightening in monetary policy might still be appropriate in coming months."

The forecasts highlighted how the MPC expects the UK economy to take a turn for the worse, with unemployment, after hitting a trough at just under 3.5% in 2022 Q3, forecast to rise to just under 5.5% three years ahead.

Real post-tax household disposable income. the measure of what households will be free to spend, was shown declining by 1.75% this year with real post-tax labour income down 3.75%, the largest fall on record.