MNI: BOE MPC Hikes 75bps, Says Market Rate Peak Was Too High

The Bank of England's Monetary Policy Committee voted seven-to-two for a 75 basis point increase to 3.0% at its November meeting, with two members voting for smaller increases and with the MPC delivering a clear message that Bank Rate would likely have to rise less than markets had been assuming.

The committee stuck to its guidance that it would "respond forcefully" if inflation proved more persistent but it added a line to its guidance, stating that Bank Rate was likely to rise "to a peak lower than priced into financial markets," which at the time it assessed to be 5.2%.

Since then, the market implied peak has dipped to around 4.75%, but the MPC's projections in the Monetary Policy Report made a strong case that tightening expectations have been heavily overblown.

On the market rate path the UK was shown facing eight consecutive quarters of negative growth with a 2.9% peak-to-trough fall in output, 6% unemployment and inflation falling to near zero, at 0.02%, at the end of the three year forecast horizon.

Even on the constant policy projection inflation was shown at 0.84% three years out and at 2.16% in two years, while it was at 1.43% in two years on market rates.

The 75 bps hike was in line with analysts' and  market expectations, which had been scaled back from 100 bps or more following the partial reversal of government fiscal easing, although the extent of the anticipated collapse in inflation in the Bank's forecasts may well come as a surprise.

DOVISH DISSENT

The two dissenters on the MPC were Silvana Tenreyro, who backed a 25 bps rise and Swati Dhingra, who oped for a 50 bps rise.

They also appeared to dissent from the view expressed in the policy statement that "further increases in Bank Rate might be required" with only a majority on the MPC supporting this line. 

The minutes stated that Tenreyro had noted that most of the tightening over the past year had yet to feed through and that the UK was entering recession and that she believed "further gradual tightening was warranted" at the November meeting.

Dhingra took the view that with elevated uncertainty "a smaller rate increase was warranted to safeguard against creating a deeper and longer recession."

HALF WAY ON ENERGY PRICE CAP

The MPC had to deal with deep uncertainty over fiscal measures in its forecasts, with the next t announcements, in the Autumn Statement, pushed back to Nov 17.

A key decision the Treasury has to make is what to do with the price cap on energy units, the Energy Price Guaranteed, which it has stated will only last for six months rather than the two years it initially announced, while it works on a successor scheme.

The MPC assumed that after six months prices for the next two years would rise to half way between those under the EPG and those that would have been in place without it, entailing average household energy bills would increase by around GBP3,000 per year from GBP2,000 previously. It said the EPG could add to inflation pressure in non-energy sectors.