MNI BOE WATCH: Hikes 25bps, Leaves Door Open To More

The Bank of England raised rates by 25 basis points on Thursday, significantly raising its growth forecasts and leaving its guidance unchanged that further tightening would be needed if there were signs of more persistent inflation pressures.

The seven-to-two vote to lift Bank Rate to 4.5%, with Swathi Dhingra and Silvana Tenreryo voting for no change, was widely expected. Some analysts had speculated the Monetary Policy Committee could tweak its policy wording to raise the hurdle to future hikes or to signal a peak was near but it stuck to the line that if inflation appeared to be sticky it would be ready to tighten again.

The MPC forecast inflation would fall from 8.2% in the second quarter of this year to 3.4% in the same period of 2024, up sharply from the 1.0% it previously forecast.

"We have to stay the course until inflation falls all the way ... to the 2% target,” BOE Governor Andrew Bailey told a press conference:

The key question is how long a big shock to underlying inflation will need to work its way through the system, he said, adding that this process was taking longer than expected. The MPC's data-dependent approach leaves the peak level of Bank Rate uncertain, with Overnight Index Swaps implying a maximum level just over 4.8% by around September.

"We have to adjust meeting-to-meeting," Bailey said, "We are not giving a direction, a steer, on rates."

INFLATION AT TARGET ON MEAN FORECAST

Inflation in two and three years was shown undershooting the 2% target markedly on the Bank's market rate modal, or single most likely, forecast , at 1.1% and 1.2% respectively, while on the mean forecast it was dead on target at 2.0%. But BOE Chief Economist Huw Pill and Deputy Governor Dave Ramsden have both said they place less weight on two- and three-year projections, because the Bank’s models work are less trustworthy in periods of high inflation.

Questioned by MNI, Deputy Governor Ben Broadbent said projections "were not intended to communicate" with financial markets.

Second-round inflation effects on domestic prices and wages "are unlikely to go away as fast as they appeared," Bailey said, stressing uncertainty over the outlook further out.­­ (See MNI POLICY: UK Labour Market Tight On All BOE's Measures)

The MPC revised up its growth forecasts significantly, erasing its prediction of a recession and instead predicting prolonged if slow growth. The forecasts in the quarterly Monetary Policy Report showed the largest upward revision between quarterly forecasts on record, of 2.25 percentage points over the three years.

GDP growth was expected to be flat in Q1 and Q2 this year, but removing hits from strikes and the coronation holiday the underlying pace of growth was assumed to be 0.2% on the quarter, with total 2023 growth 0.25%, up from a previous forecast of -0.5%, and 2024 growth 0.75%, up from -0.25%. While lower energy prices were key to the forecast upgrades, extra stimulus from the Spring Budget was estimated at 0.5 percentage points.

A higher growth outlook was accompanied by a reduction in the projected jobless rate, with a peak of 4.5% at the end of the three-year horizon, down from 5.3% previously. Deputy Governor Dave Ramsden said the labour market was proving very resilient.