MNI BOE WATCH: Further Hikes Likely, Market Peak Overblown
The BOE Monetary Policy Committee hiked 75 basis points at its November meeting, saying further rises are likely but suggesting the market peak was overblown.
The Bank of England hiked Bank Rate 75 basis points to 3.0%, at Its November meeting, with the majority of members taking the view that more hikes were likely needed while hammering home the message that the recent implied market peak of 5.25% was overblown.
BOE Deputy Governor Ben Broadbent told a press conference following the decision that it was true that both further tightening was likely and that the Monetary Policy Committee thought the policy rate was "not likely not have to go as far as 5.25," the peak of the market curve used in the Bank's forecasts.
"We never said we are aiming for a soft landing," Broadbent said.
While the 75– basis– point increase was widely anticipated, after markets rowed back on previous expectations of a hike by 100 basis points or more following the partial reversal of fiscal easing in September's ill-fated mini-Budget, the forecasts in the Bank's Monetary Policy Report were striking. They showed inflation on the market rates path heading down to near zero and even on a constant rate path undershooting the target by a considerable distance.
On the constant rate path the target CPI inflation measure was shown at 2.16% in two years' time, just above the 2.0% target, before falling to 0.84% in three years while on the market path it was at 1.43% in two years and 0.02% in three. Governor Andrew Bailey said officials expected the policy rate to follow a path "nearer to the constant rate curve than the market curve."
Bailey and colleagues stressed the risks around the central forecast, with inflation risks very much to the upside. The detailed projections showed that the skew, the difference between the mean and the mode, was 0.5% to the upside at the two– and three–year points on both market and constant rates. Individual members place hefty weight on their own perceived risks around the forecasts and the skew shows that on constant rates inflation could be 0.7 percentage points above target two years out.
This balance of risks, with MPC members concerned about persistent inflation, in part due to a tight labour market and elevated inflation expectations, helps to explain how the committee continues to expect to tighten further despite showing a marked inflation undershoot on its central, modal projection.
Broadbent highlighted the contrast between the challenges faced by policymakers in the UK and elsewhere in Europe, where surveys suggest contraction, and those in the U.S., where purchasing managers’ surveys suggest that activity is back around pre-Covid levels.
The BOE forecast an eight–quarter, shallow recession for the UK, starting in Q3 this year, with unemployment rising to 6%. Asked by MNI, Broadbent replied that the risks around the jobless rate forecast were balanced.
For now, the labour market remains tight with the Monetary Policy Report noting that inactivity in the UK was much higher than in other developed economies. The rise has been concentrated in older working age people, aged 50 to 64, and the Bank noted data showing that around a fifth of these were on health service waiting lists.
The MPR did not contain any comprehensive review of the labour supply. It highlighted uncertainties still surrounding energy prices and global developments.