MNI: BOE MPC In Policy Pause; Rates Restrictive for Longer

The Bank of England as expected left its policy rate on hold at 5.25 on a split vote, with three members voting for a 25 basis point hike and none voting for a cut.

The Monetary Policy Committee said that, based on its updated economic forecasts, "monetary policy was likely to need to be restrictive for an extended period of time," driving home the message that rates were set to remain high-for-long.  With the economic forecasts based on market rate assumptions for Bank Rate to peak at 5.25% the message is compatible with the 'Table Mountain' approach, leaving policy rate steady at an elevated level.

The Bank insiders on the MPC all voted for unchanged policy with three externals, Megan Greene, Jonathan Haskel and Catherine Mann voting for a 25 bps hike and no votes for a cut.

The Bank's updated economic forecasts showed CPI on its modal, or most likely forecast, at 1.9% in two years' time, a sliver below the 2% forecast and at 2.2% on the mean forecast and 1.5% on the modal and 1.9% on the mean in three years.

GROWTH

Growth forecasts were revised down to show an economy that is stagnating. Quarterly year-on-year growth was projected to be zero in the fourth quarter of this year and the first quarter of next and just 0.1% in Q2 2024, grinding up to 1.1% by Q4 2026, the end of the forecast period, with the end-forecast growth level around a percentage point below that foreseen in August.

The majority on the MPC who backed no rate hike cited evidence of further labour market loosening -- despite the flawed official data -- with vacancies having declined and unemployment expected to rise from 4.2% in the latest data to 5.1% by Q4 2026.

The majority said that "a further rise in Bank Rate remained a possibility" while one member, presumably Swathi Dhingra based on her public comments, warned again of the risks of over-tightening.

NATURAL JOBLESS RATE UP

The Bank's economists, as MNI reported, are set to complete their supply side stock take, centred on their in-depth labour market probe, for the February forecast round and there was no fresh take on potential UK growth in this forecast round.

Ahead of that stock take, however, the MPC was confident enough of the way things have moved to revise up its estimate of the equilibrium jobless rate, or U*, to 4.5% from just over 4.0% previously, citing higher wage growth and inflation pressures despite the jobless rate having held close to 4.0%.

On its latest forecasts the MPC sees the jobless rate above U* from  Q2 2024.