MNI BOE WATCH: MPC Holds Firm, Focus On Inflation Persistence

The Bank of England made no concessions at its December meeting to markets pricing in more aggressive easing, leaving the policy rate steady at 5.25% and retaining guidance that points to high-for-long interest rates while highlighting the risks of inflation persistence.

Even the vote split on the Monetary Policy Committee was unchanged from November, with three of the nine members, Megan Greene, Jonathan Haskel and Catherine Mann, calling for a hike,. Ahead of the meeting, market pricing pointed to over 100 basis points of cuts in 2024 but the MPC remains concerned about the risks of inflation in the UK irrespective of signs of easing international price pressures.

The majority on the MPC who voted for unchanged policy highlighted concerns over core inflation, with services inflation, driven by strong wage growth, yet to show clear signs of heading down.

"It was too early to conclude that services price inflation and pay growth were firmly on a firmly downward path," and inflation persistence on both these measure was higher in the UK than in other major advanced economies, the minutes said, citing unfavourable supply side developments, notably a tight labour market and impaired labour supply.

OVERTIGHTENING RISK

The minutes underscored that only one member, presumably Swati Dhingra, has a significantly different take on the current outlook. The member highlighted the risks of overtightening given the lagged effects of past rate hikes. (See MNI POLICY: BOE's MPC Converges On High-For-Long Message).

Greene and Haskel's public comments ahead of the meeting had suggested that they could opt for unchanged policy, but in the event they stuck to their vote for a hike though the momentum behind further tightening appears to have faded with some moderation in wage growth.

The guidance restated that "policy was likely to need to be restrictive for an extended period."