MNI STATE OF PLAY: BOE Hikes 50bps And Launches Gilt Sales

The Bank of England’s Monetary Policy Committee split three ways as it lifted its policy rate by 50 basis points to 2.25% at its September meeting while unanimously backing the launch of its gilt sales programme even as a government package aimed at mitigating the jump in energy costs is set to ramp up public borrowing.

The meeting’s minutes showed that five of the nine-member MPC, including Governor Andrew Bailey, who votes last, opted for 50bps, while three wanted 75bps and one only 25bps. The likelihood is now that the next meeting in November will also see opinions divided over whether to hike by an additional 50 or 75 bps.

Any speculation that the Bank might delay launching, or significantly scale back, its gilt sales programme because of the looming increase in government borrowing turned out to be misjudged, with all nine MPC members backing the decision to start the gilt sales programme outlined in August. The BOE aims to reduce its stock of gilts by GBP80 billion over the next 12 months, with active sales accounting for around GBP40 billion and the remainder coming as bonds mature without being replaced.

A detailed market notice set out plans to sell GBP8.7 billion in the fourth quarter. The MPC said that "there would be a high bar for amending the planned reduction in the stock of purchased gilts", and that it would not vote on the programme at each meeting.

The government’s looming fiscal package, due out Friday, was sidelined in the debate, with no recorded discussion of its still-unannounced details and full analysis of its impact only set to be addressed in the Bank's November forecast round. A household Energy Price Guarantee, which has been made public and caps energy unit costs, was assessed and it was agreed that it would bring down the peak in near-term inflation while adding to medium-term price pressures relative to the BOE's previous assumptions.

FULL STEAM AHEAD WITH QT

Halting the gilts sales would have risked sending an alarming signal of a lack of confidence in the capacity of the market to absorb the necessary debt as conditions deteriorate. Bailey and his deputies have previously said that they want to have sales ticking away predictably in the background whilst interest rates serve as the main policy tool. (See MNI INTERVIEW: BOE Balance Sheet To Remain A Political Target)

The minutes did not reveal whether the MPC was briefed on the scale and scope of Friday's fiscal giveaway.

The minutes showed that those members who who backed 75 bps made the case that faster policy tightening sooner would lower the risk of more prolonged and costly tightening later.

The five who voted for 50bps also made a hawkish case, citing the need for "forceful" action ahead of the November forecast round. Even newcomer Swati Dhingra, who voted for 25bps, considered the case for 50bps in part because of the likely impact of further fiscal support, thouh she was dissuaded by signs that economic activity was already weakening and that higher service sector inflation might not persist as it may partly reflect energy price or base effects.

Uncertainty over how far and how fast the MPC will tighten was highlighted by its own Market Participants Survey, which found that median expectation had been for a 50 bps hike in September and for Bank Rate to peak at around 3.5% in March 2023, while market implied expectations had placed a significant probability on a 75 bps hike and had Bank Rate peaking at 4.75%.