MNI: BOE MPC Hikes 25BPS, To Update Outlook in May

The Bank of England Monetary Policy Committee voted seven-to-two for a 25 basis point rate hike at its March meeting following an upside surprise to inflation in the February data.

The MPC anticipated that inflation would fall markedly in the second quarter and more than it had previously expected with services inflation set to remain broadly unchanged but the majority took the view that stronger-than-expected near-term growth and the upside inflation shock justified tightening.

"Headline CPI inflation had surprised significantly on the upside and the near-term path of GDP was likely to be somewhat stronger than expected," the minutes stated with the majority placing some weight on the idea that the stronger domestic and global demand reflected something more than the decline in energy prices.

The minutes showed that the Bank has pulled its forecast for a contraction in activity in the second quarter with a slight increase now anticipated rather than the 0.4% quarter-on-quarter fall foreseen in the February forecast. Bank staff forecast employment growth of 0.2% in the second quarter compared to a 0.4% fall predicted in February.

A key upside inflation risk came from the sustained demand for labour which could result in more persistent consumer prices.

Rate expectations had gyrated ahead of the meeting, with the elevated February inflation data published Wednesday swinging market pricing from placing around a 50% chance on a hike to nearly fully pricing one

The minutes, however, highlighted the uncertainty around the outlook with the committee looking forward to carrying out a comprehensive review of the economic outlook in the May Monetary Policy Report forecast round.

Two Dissents

The only dissents came on the dovish side, with both Swati Dhingra and Silvana Tenreyro voting for unchanged policy. They anticipated that inflation would fall sharply through 2023 and that the lagged effects of previous hike were still to feed through and were likely to drive inflation to well below the 2% target in the medium term.

They also suggested that rate cuts would be required sooner than previously expected.

Recent earnings data were compatible with the minutes noting that private sector surveys suggested regular pay growth could undershoot the MPC's most recent projections.