MNI STATE OF PLAY: BOE Sticks To Gradual Tightening For Now

The Bank of England stuck to gradual tightening at its June meeting, delivering another 25-basis-points hike, but hardened its guidance with a promise to do what is necessary to get inflation to target and to "act forcefully" if need be.

While three Monetary Policy Committee members, Catherine Mann, Jonathan Haskel and Michael Saunders, voted for a 50-basis-point increase, all had all done so in May and none are Bank insiders, with everyone else backing 25 bps.

But the BOE toughened its language, promising that it “will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response,” in a formulation which received backing across the MPC.

UNANIMOUS FORCEFUL POLICY WARNING

The new wording is not explicitly data dependent, with no particular data set or sets cited, and no likelihood ascribed to further hikes. The guidance also specifies that “the scale, pace and timing of any further increases in Bank Rate will reflect the Committee’s assessment of the economic outlook” as well as of inflationary pressures.

In May the previous guidance, that a "degree of further tightening in monetary policy may still be appropriate in the coming months," had failed to capture the views either of members who were confident more tightening would be needed or those who were less certain. As a result, it had split the Committee, with two members dissenting from the wording. (See MNI INSIGHT: BOE Rates Guidance Underplays Tightening Bias).

LITTLE NEW DATA

The economic analysis in the June minutes was thin, with the next detailed exploration due in the August forecast round. There were, however, some nuggets. Upside inflation risks may be crystallising, the Bank said, which would suggest that when the Bank completes the August economic projections the MPC could find it has more do more than it previously thought to squeeze inflation back to target.

In its May forecast round, it had projected that assuming unchanged policy inflation would fall to just below 3.0% two years ahead, leaving it with around a percentage point of inflation to crush through monetary policy.

The June minutes and policy summary, however, pointed to a possible intensification of price pressures beyond global commodity and energy market increases.

"Not all of the excess inflation can be attributed to global events" with "domestic factors, including the tight labour market and the pricing strategies of firms" playing a role, the statement said.

The MPC vote took place before the Federal Reserve decision to raise rates by 75 bps was known and the impact of higher rate expectations on monetary and financial conditions will also be factored into the August forecast round.