MNI BOE WATCH: MPC On Hold As Hawks Fold But Fractures Remain

The Bank of England's Monetary Policy Committe voted eight-to-one for unchanged policy at its March meeting, with no member voting for a rate hike for the first time since September 2021 as Jonathan Haskel and Catherine Mann dropped their previous call for a 25-basis-point rise and Swati Dhingra again backed a cut.

In an additional statement Governor Andrew Bailey spelled out the message that the MPC was moving towards easing but "we're not yet at the point where we can cut interest rates". The rates market implied probability of a first BOE rate cut in June rose to about 72% from 62% before the meeting.

The meeting's minutes noted there was a range of views as to "the extent to which the risks from persistent inflationary pressures had receded." So while Haskel and Mann's move to the unchanged camp underscored that the hiking cycle is over, a cut in coming months is unlikely to be unanimous.

RANGE OF VIEWS

One view was that restrictive monetary policy had fed through to the unwinding of second-round inflation effects and a decline in inflation persistence while at the other end of the spectrum it was argued that there were only limited signs of services inflation returning to a pace consistent with the 2% target and only tentative signs of diminishing second-round effects.

The latter view is in line with the public comments by Mann and suggests that while she has joined the unchanged camp she is not yet close to backing a cut. The minutes added that while all the unchanged camp wanted further evidence to justify a policy shift members differed on how much evidence was likely to be needed. (See MNI INTERVIEW: BOE Right To Be Cautious Over Cuts - NIESR)

GUIDANCE UNCHANGED

Dhingra is already pushing for a cut, arguing that waiting for further reassurance before easing would weigh on supply capacity and living standards and that consumer price inflation was already on a firm downward trajectory.

The MPC stuck to the guidance it introduced in March, saying it would "keep under review for how long Bank Rate should be maintained at its current level" and would closely monitor indicators of inflation persistence, notably on labour market tightness, wage growth and services price inflation.

The committee's summary of recent economic data stated that the labour market had continued to loosen but was still tight by historic standards, services inflation had declined but was still elevated and short-term inflation expectations had largely softened, with the Bank's agents reporting firms expected some decline in wage settlements this year. The agents' report published alongside the minutes said firms reported that recruitment continued to get easier and that evidence was mounting for lower pay settlements in 2024 than in 2023.