MNI BOE WATCH: Cuts 25BP, Ups Inflation View, Neutral Estimate
MNI (LONDON) - The Bank of England delivered its anticipated 25-basis-point cut to 4.5% at its February meeting but predicted that inflation would rise sharply in the near-term, while a slight increase in its estimate of the neutral rate of interest offset a dovish surprise in the vote.
The composition of the Monetary Policy Committee vote caught analysts by surprise. Seven supported the 25bp cut and two, Swati Dhingra and Catherine Mann, backed a 50-point reduction. Most analysts had predicted an eight-to-one vote with Mann anticipated to have continued her opposition to easing rather than swinging to the other end of the spectrum.
While the vote was more dovish than foreseen, the inflation forecasts were not, with the rate of increase in prices shown peaking well above the 2.0% target, at 3.7% in Q3 this year, up from a previous predicted peak of 2.8%.
Near-term activity forecasts were lowered, with GDP growth expected to be just 0.1% on the quarter in Q1, down 0.3 percentage point from the November forecast. The economy was still expected to accelerate in the second half of the year and by Q1 2025 four-quarter growth was put at 1.5%, little changed from November.
The minutes suggested that MPCs members' views are fragmented, with different interpretations of how much weak growth reflects impaired supply or demand effects. On one view removal of monetary policy restriction should be cautious and gradual because weak activity and employment may be reflecting supply constraints, while on another gradualism was justified given that while disinflation remains on track global uncertainty has increased and risks around inflation are two-sided.
A key area of uncertainty stems from the labour market, with the official Labour Force Survey data impaired by low response rates. BOE staff estimated that LFS unemployment would fall from 0.2% in Q4 to just 0.1% on the quarter in Q1 and that the labour market was broadly in balance with downside risks. The BOE agents’ annual pay survey pointed to growth in pay settlements dipping to 3.7% this year, still near the upper end of the previous 2-4% estimate.
R STAR UP
The dominant view on the MPC is that policy needs to remain restrictive, and a review by Bank economists of the neutral rate, R*, slightly reduced room before that level is reached. The first such reassessment in a Monetary Policy Report since 2018 concluded that R* had risen modestly, by around 25 to 75bp, to as high as 3.0% in nominal terms.
In 2018, the mode for R* across a range of estimates back was 0.25% in real terms or a nominal 2.25%.
At the press conference, Governor Andrew Bailey warned against using a point estimate for R* while Deputy Governor Clare Lombardelli described it as one of a basket of measures used to assess the degree of policy restrictiveness. Rather, the MPR said that the R* estimate can act as a long-term anchor the policy rate. (See MNI POLICY: BOE Looks Set To Edge Up Neutral Rate Estimate)
The BOE had, until the February MPR, largely avoided assessing the likely impact of the imposition of U.S. tariffs. This time its analysis highlighted the lack of clarity over the potential effects on growth and inflation, with business investment likely to be hit by increased uncertainty but weaker global demand and rerouting of exports previously destined for the U.S. potentially providing offsetting disinflationary effects.