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Free AccessMNI: BOE Surprises With 50bps Hike, Cites Persistent Inflation
The Bank of England Monetary Policy Committee sprung a surprise Thursday in hiking more aggressively than widely expected, with seven of the nine members backing a 50 basis point hike in June.
The move lifted Bank Rate to 5.0% with the majority justifying the decision with reference to the persistence of inflation, with second round effects taking longer to unwind. The MPC said nothing to push back directly against market rate expectations for a near 6% peak in Bank Rate, instead sticking to its previous line that if there was evidence of more persistent inflation pressures, further tightening would be required.
The majority view was that recent data "indicated more persistence in the inflation process" against a backdrop of a tight labour market and resilient demand, according to the June minutes.
"The scale of the recent upside surprises in official estimates of wage growth and services CPI inflation suggested a 0.5 percentage point increase in interest rates was required," the minutes said.
CPI TO FALL
The MPC still expected CPI inflation fall significantly through 2023 although service sector inflation, a proxy for underlying inflation which largely reflects pay pressures, was expected to remain broadly unchanged in the near term and core goods inflation was projected to drop back later in the year.
The committee highlighted the importance of getting inflation expectations anchored to the 2.0% inflation target. While business and household expectations had eased they were still above long-run averages and market-based inflation compensation measures had increased since the previous meeting, the minutes noted.
DISSENTERS
The two dissenting votes came from independent MPC members Silvana Tenreyro, attending her final meeting, and Swati Dhingra, who both backed unchanged policy.
They noted that the effects of previous tightening had still to feed through and recent rises in rate expectations, which have driven mortgage and other lending rates higher, would amplify this lagged effect.
The pair also argued that goods price inflation should fall sharply, as global cost shocks reversed, and that forward looking indicators were pointing to sizable falls in wage and price inflation.
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