MNI: BOE MPC Hikes 25bps To 0.75%, Softens Guidance

The Bank of England Monetary Policy Committee delivered the expected 25 basis rate hike at it March meeting, with no members voting for a larger increase, whilst softening guidance on further near-term tightening.

The MPC split eight-to-one in favour of the 25bps hike, with Deputy Governor Jon Cunliffe voting for unchanged policy, confounding some analysts' predictions that some MPC members would vote for a 50 bps hike. The MPC also softened its guidance to state that further tightening in coming months "may be appropriate" rather than likely as it had previously said.

The minutes of the March meeting gave the MPC's first assessment of the likely impact of the war in Ukraine. It was expected to both push up on near term inflation, which is expected to reach around 8% in the second quarter (7% in February report), possibly higher later in the year, and to depress economic activity.

INFLATION OUTLOOK

Further ahead, the MPC noted the effects could though push inflation further below target than previously expected.

"Further out, inflation was expected to fall back materially and possibly to a greater extent than had been expected in the February (Monetary Policy) Report," the minutes said.

The February projections, the most recent full, quarterly set, showed inflation undershooting the 2% target based on the market rate path and coming in at 1.60%. The MPC now reckons this undershoot could be larger still. 

While around 8% was given as the near-term peak in inflation the minutes made clear that it could rise still higher than this later in 2022, as the effect of higher energy prices feed through and the energy price cap is likely to be raised again in October.

Cunliffe justified his dissenting vote by citing "the very material negative impacts of higher commodity prices on real household incomes and acitivity," noting that these effects had been exacerbated by Russia's invasion of Ukraine.