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MNI BOE WATCH: Internal MPC Members Deliver 50bps Hike

(MNI) London

The Bank of England said it was raising rates by a widely-expected 50 basis points on Thursday, but its nine-member Monetary Policy Committee split three ways, with two external members voting for no change and another calling for 75 basis points.

The MPC stuck to guidance that it would act forcefully if inflation proved to be more persistent and the majority said further hikes were likely. With Governor Andrew Bailey having indicated in November that the policy peak was not expected to be above 4%, upcoming hikes look more likely to come in 25-basis-point increments.

There was no new forecast round in December, so analysis of economic developments in the meeting minutes was limited. Members highlighted signs that labour market tightness was beginning to ease and Bank staff confirmed in their analysis that measures in the government’s Autumn Statement constituted near-term fiscal easing which would boost growth next year and only turn into a drag three years ahead.

Market expectations were firmly centred on a 50 bp hike, but there been uncertainty over precisely how the MPC would split. In the event both Swati Dhingra and Silvana Tenreyro, who had previously warned of the dangers of over-tightening as the economy started to contract, voted for no change, while Catherine Mann dissented on the hawkish side, restating her view that the optimal policy path was to front-load hikes.

"Pulling forward monetary action now would reduce the risk that Bank Rate would need to rise well into next year even as the economy slowed further," Mann argued.


The MPC, having made it clear that the market expectations at the time of its November forecast round for the policy rate to peak at 5.25% were too high, offered no commentary on more recent pricing, which has pushed the peak towards 4.5%. (See MNI POLICY: BOE Points To 4% Peak At Most, Then Rate Cuts)

A key question for the MPC is whether the economic slowdown and tightening carried out so far will be enough to get inflation sustainably back to, or even below, target, or whether, as Mann suggested, the committee risks finding itself having to carry on hiking for longer than anticipated if inflation proves stickier.

A majority on the MPC acknowledged Mann’s point, with the minutes noting the dangers that domestically-generated inflation pressures will remain elevated.

"Following a protracted period of high inflation, inflation expectations could be slow to adjust downwards to target-consistent levels once external cost pressures had passed," the minutes stated.

While they pointed to evidence that the labour market was beginning to cool, with vacancies decreasing and recruitment difficulties lessening, the majority agreed it was uncertain how quickly this easing would proceed.

The economy is expected to be near stagnant this quarter and to then contract gently. The MPC will wait for its February forecast round to reassess the outlook, but despite its expectation for inflation to have peaked and to start falling sharply falling sharply in the spring, questions over how far and how sustainable this decline will prove make more splits on the Committee likely.

MNI London Bureau | +44 203-586-2223 |
MNI London Bureau | +44 203-586-2223 |

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