• - MPC votes 7-2 to increase bank rate
• - Bank will closely monitor banking developments
• - Policymakers leave room for more action
• - Rates have likely peaked - analysts

By Harry Daniels

LiveSquawk News

@HarryDaniels71

23 March 2023 | 14:30 GMT

LONDON – For major central banks, inflation fighting credentials appear to trump financial market volatility. As such, it was no surprise the Bank of England followed in the footsteps of the ECB and the Federal Reserve and raised its interest rate.

As expected, the bank’s Monetary Policy Committee elected to increase its main lending rate by 25 basis points to 4.25%. However, as has been the case over the past year or so, the decision wasn’t unanimous, with both Swati Dhingra and Silvana Tenreyro preferring to keep rates unchanged. It also repeated guidance.

Consensus was for a hike, but a number of commentators had hedged their bets viewing the recent market disruption as reason enough for the policymakers to stop short of the expected target level.

Nomura’s George Buckley said, “Markets had been pricing in less than 10bp for this week’s meeting around the middle of last week, but yesterday’s surprisingly strong February CPI print was a game-changer and immediately ahead of today’s meeting around 22bp of the 25bp hike was priced.”

Wednesday's CPI report triggered an exchange of letters between the bank governor, Andrew Bailey and the UK’s Chancellor (finance minister) Jeremy Hunt. In his letter to Hunt, Bailey explained that most of the surprising strength in the core goods component of the CPI in February was, accounted for by higher clothing and footwear prices, “…which have tended to be volatile and could therefore prove less persistent.”

But, in phrasing that mirrored the bank’s guidance, Bailey wrote, “The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.” Some analysts have interpreted this to mean the bank has ‘left the door open’ to further hikes.

“The forward-looking element of the minutes is careful not to pre-commit to May's decision. But it broadens the criteria for further hikes to include labour market tightness, while elsewhere the minutes make clear that the growth forecasts are likely to be revised up,” Andrew Goodwin, chief UK economist at Oxford Economics noted. “So, assuming financial market conditions don't deteriorate, the bar for further rate hikes looks lower than it was before,”.

Interestingly, the bank minutes gave relatively little attention to current market disruption compared to the ECB and the Fed and chose to refer to BoE’s Financial Policy Committee’s briefing of the MPC.

There was also passing mention of the government’s Spring Budget, although it acknowledged that bank staff had provisionally estimated that measures announced, relative to the February Report, will increase the level of GDP by around 0.3% over coming years. 

With all the noise, opinion appears divided regarding the question of further action:

Nomura’s Buckley said his team retains the view that Thursday’s quarter point increase will be the last. “The committee will decide to pause its hiking cycle and keep rates on hold for around a year before cutting by 75bp around the middle of 2024.”

Investec’s Ellie Henderson said, “Our own view is that today’s may indeed have been the last hike in the tightening cycle. But given the current volatility and rapidly evolving nature of the stresses in the banking sector, it is hard to say with any certainty what will come next. We, like the Bank of England and other central banks and institutions across the world, will be monitoring the coming weeks closely as the extent and scale of the financial vulnerability become clearer.”