MNI STATE OF PLAY: BOE Hikes, Two Doves Dissent From Guidance

The Bank of England raised its benchmark rate by 25 basis points as expected at its May meeting, but the Monetary Policy Committee split three ways as forecasts showed inflation continuing to rise even as growth falters, with two members dissenting from guidance that further tightening might be needed in coming months.

The MPC's projections showed inflation peaking at just over 10% in October but also sliding back to 1.3% at the end of the three-year forecast for the biggest projected undershoot since the wake of the financial crisis. Output is expected to be nearly flat next year, assuming rates follow the market path.

Such a divergence between the outlooks for near-term inflation and output divided the Committee even as it hiked Bank Rate to 1%.

MPC SPLIT

External members Jonathan Haskel, Catherine Mann and Michael Saunders had all indicated they would vote for a 50-basis-point increase, calling for more aggressive tightening to combat the ratchet higher in pay pressures and firms' pricing strategies. But two members were not in agreement with guidance pointing to the likelihood of further rate hikes ahead.

While these dissenters were not identified, Deputy Governor Jon Cunliffe voted against the last hike and Silvana Tenreyro has played down the need for significantly more tightening.

BOE Governor Andrew Bailey has spoken about "treading a fine line" between tackling inflation and recession but Deputy Governor Ben Broadbent stressed at the press conference that the key factor that will drive up inflation and hit real household incomes, driving down consumption, is the surge in commodity prices that monetary policy cannot offset.

Output is seen declining by 0.25% in calendar-year 2023, versus the 1.25% growth expected in the February forecast. Gross domestic product should rise by just 0.25% in 2024. Real post-tax household disposable income, a measure of consumers’ discretionary spending power, was shown falling by 1.75% in 2022 and rising just 1% in 2023.

The broad outline is of an economy skirting recession with consumption squeezed as wage growth fails to keep pace with inflation, and unemployment rises from a low of 3.5% to 5.5% by the end of the forecast period.

GILT SALES POSTPONED

The BOE had previously said it would examine whether to enhance its quantitative tightening by actively selling gilts once Bank Rate hit 1%, but in the event it postponed a decision, announcing that its staff were working on a framework for sales and would report back in August.

Broadbent, in response to a question from MNI, reaffirmed the MPC's position that it wants rates to be its primary policy tool and that it would like to be in a position to cut Bank Rate, if needed, in order to be able to offset future economic weakness. Deputy Governor Dave Ramsden noted that this will be the first time the Bank has sold gilts since it launched quantitative easing following the global financial crisis and that it is appropriate to seek clarify the framework for such sales.

The BOE is trying to make the sales marginal to policy, shrinking the balance sheet while hoping to do so without delivering significant additional tightening, and by August it will have had more time to study the market reaction to QT.