MNI STATE OF PLAY: BOE Set To Hike, Signal Another Soon

The Bank of England looks set to raise Bank Rate by 25 basis points for a second meeting in a row this week, taking it to the 0.5% threshold for it to begin reducing the size of its balance sheet, and to open the door to another hike in May.

Governor Andrew Bailey and colleagues on the Monetary Policy Committee are likely to signal that swift tightening should avoid the need to act more aggressively later, though rate path projections in the accompanying Monetary Policy report may do little to reduce market doubts over where Bank Rate will conclude the year.

With analysts debating whether the policy rate is likely to see in 2023 at 1% or 1.25%, the MPC’s projection assuming unchanged policy is likely to show inflation overshooting the 2% target, but the market rate path could show inflation close to, or even slightly beneath, target, possibly indicating that investors are overestimating the pace or extent of future tightening. While investors will attempt to extract a policy signal from the MPR projections, officials including Deputy Governor for Monetary Policy Ben Broadbent have cautioned that this is not straightforward.

Despite some market speculation that the looming redemption of the Bank’s GBP27.94 billion in March 2022 gilts might prompt a delay to start of the natural runoff of its balance sheet, tightening guidance issued in August indicated that an end to reinvestment of the proceeds of maturing bonds was almost certain once the policy rate hit 0.5%, and any change to this stance would only confuse the BOE’s messaging. It will decide whether to actively sell gilts once the rate reaches 1.0%.

VOTE HARD TO PREDICT

With only Bailey and MPC member Catherine Mann having spoken this year, the MPC vote is harder than usual to predict. Governor Bailey gave little away in an appearance before the Treasury Select Committee, while Mann told an OMFIF event that early policy action could dampen expectations feeding wage-price inflation and ultimately achieve a flatter rate path.

It is also uncertain whether Silvana Tenreyro, who alone voted against the December hike, will maintain her opposition to tightening. She argued for a wait-and-see approach in order to ensure the recovery was not materially threatened by Omicron, but since then the economy has remained open, with some indications that supply chain disruption by the latest Covid wave may be adding to inflationary pressure.

Other MPC members have kept their counsel. New chief economist Huw Pill is sceptical of the benefits of forward guidance, while Broadbent has said central banks should not "spoon feed" market participants.