MNI BOE WATCH: Hikes 25bps, Unsure More Hikes Needed
The BOE hiked by 25bps following an upside headline inflation surprise and took a wait-and-see policy approach
The Bank of England hiked its benchmark rate by 25 basis points at its March meeting following a surprise rise in February’s headline inflation, but highlighted uncertainties surrounding the economic outlook and predicted a sharper-than-anticipated fall in near-term inflation and slower earnings growth.
The minutes and policy statement accompanying the hike revealed that while the Monetary Policy Committee foresaw growth holding up better than expected near-term, with 0.4% quarterly expansion in the second quarter rather than contraction, they nonetheless still expected inflation to decline sharply and earnings growth to ease. The committee said it would use the May forecast round to review the outlook, with the MPC stressing that uncertainty was high and restating that it would hike further if there was evidence of more persistent inflation pressure.
After the surprise 1.1 percentage point m/m rise in headline inflation to 10.4% in February, data which had been made available to the MPC during their policy meeting, the committee avoided any numerical prediction of what would happen in March but noted inflation levels would fall and that it now expected a larger decline in the headline rate in the second quarter than previously expected.
"CPI inflation is still expected to fall significantly in 2023 Q2, to a lower rate than anticipated in the February Report," the minutes stated, while service sector inflation was seen likely holding steady. The surprise rise in core goods inflation in February was largely due to volatile clothing and footwear prices and these increases may not persist, the minutes stated.
NEAR-TERM GROWTH OUTLOOK
The employment outlook was brighter, with a rise of 0.2% expected in Q2 rather than the fall previously predicted, but the Bank's own business survey and other recent data supported the view that earnings growth had eased and that private sector pay growth could undershoot the MPC's most recent forecast.
The seven members of the MPC who backed the 25bp hiked placed some weight on the view that the improvement in the near-term growth outlook was being driven by more than the fall in energy prices and that sustained labour demand could feed through to higher consumer prices.
The fall in energy prices would in itself boost activity, the minutes said.
The May Monetary Policy Report still looks set to project a coming inflation undershoot, as February’s report did. The two independents who opposed the hike, Swati Dhingra and Silvana Tenreyro, argued that current policy setting would push inflation well below the 2% target in the medium term, bringing forward the date at which rate cuts would be required.