MNI: BOE MPC Hikes 25bps With 4 Members Voting For 50bps

The Bank of England Monetary Policy Committee hiked Bank Rate 25 basis points to 0.5% at its February meeting, although four of the nine members voted for a 50 bps hike, making it clear another increase could come shortly.

The MPC's guidance and projections in its Monetary Policy Report, however, suggest that while more near-term tightening is highly likely, market rate expectations for how far Bank rate will have to rise have been overblown. On the assumption that Bank Rate rises to 1.3% at the start of 2023 and 1.4% in early 2024 inflation in the MPR projections was shown falling markedly below the 2.0% target, to stand at 1.6% three years out.

The 25 basis point hike was widely predicted but the split vote was unexpected, with three external members, Jonathan Haskel, Catherine Mann and Michael Saunders joining Deputy Governor Dave Ramsden in backing a 50 bps hike.

If the economy evolved as expected "some further modest tightening in monetary policy was likely to be appropriate in the coming months," the minutes of the February meeting said.

MARCH LIVE

The "coming months" line was dropped in the December guidance but reintroduced this month. The majority of analysts had anticipated another hike in May, but  the February vote makes clear that March will be a live meeting.

The four members who backed a 50 bps hike placed weight on elevated inflation expectations and widespread pressure on capacity.

They argued for greater tightening "to reduce the risk that recent trends in pay growth and inflation expectations became more firmly embedded."

The five backing the 25 bps hike highlighted the fact that inflation was expected to undershoot the target further out and warned of the risks of inflation falling more quickly than expected if energy and other goods prices were weaker than the MPC was assuming.

On unchanged policy projections, with Bank Rate flat-lining at 0.5%, headline CPI inflation is shown persistently overshooting the target, reaching 7.1% in Q  2022 before falling to 2.14% three years out.

NO MORE REINVESTMENTS

The MPC also voted unanimously to stop reinvesting the proceeds of maturing gilts and to fully unwind corporate bond purchases, with the latter to be completed no earlier than late 2023.

The decision to press ahead with natural run-off its assets means that the proceeds from the Bank's chunky GBP27.9 billion holding of the March 2022 gilt will not be reinvested.  

The MPC will decide whether to start active gilt sales if and when Bank Rate hits 1.0% but its decision at the February meeting ensures the path of balance sheet reduction is clear until then.