MNI STATE OF PLAY: BOE MPC Holds Fire, Flags Hike Coming Soon

The Bank of England Monetary Policy Committee voted to seven-to-two to leave its policy rate on hold at 0.1% and firmed up its messaging to make clear that tightening was on the way, with the first hike most likely "in coming months", although policymakers pushed back against market expectations of aggressive tightening to come.

The MPC's forecasts, based on Bank Rate rising to 1%, showed inflation above target at the two-year horizon but just below it three years ahead, suggesting that the latest pre-policy announcement market rate path, for Bank Rate rising to 1.3%, was clearly overblown.

The two members who voted for a hike, Deputy Governor Dave Ramsden and Michael Saunders, opted for only a 15 basis point increase.  They both voted again for an early end to the current asset purchase round, and were joined by Catherine Mann in this, but with that round set to end in December it will now inevitably be completed.

TIGHTENING SOON

The MPC restated its guidance that "some modest tightening of monetary policy over the forecast period was likely to be necessary" but added that the MPC's latest forecasts, along with recent developments, "reinforce this view."

The committee also said that, assuming labour market data unfold broadly as expected, a Bank Rate hike "would be necessary over coming months."

That guidance underscores that the December meeting will be "live", although a hike could easily be pushed back in 2022.

The MPC has been treading a tricky path between getting the message across that Bank Rate is set to rise while facing volatile money market pricing. The November forecasts underscored why market pricing looks overblown, as they had inflation on a downward path in the third year, falling from 2.23% in the fourth quarter of 2023 to 1.95% in the fourth quarter of 2024 based on a lower market curve than the pre-decision one. 

INFLATION PEAK

The MPC's forecasts showed inflation peaking at 5% in April next year and the committee expects supply bottlenecks to persist longer than it previously thought. Supply chain disruptions are a double-edged sword, with the MPC also seeing them weighing on growth.

However, the MPC highlight that energy pricing in its inflation forecast reflect futures pricing only for the next 6 months and then flat afterwards, whereas actual energy price curves slope lower over the forecast horizon, which will put 'substantial' downward pressure on inflation..

The growth forecasts were lower than in the previous forecast round, in August, with GDP growth peaking at 9.49% on the year in Q1 2022 but dropping back to below 1% from the first quater of 2024 and standing at just 0.93% in Q4 2024.