- Bank lifts benchmark interest rate a half a point to 4.0%
- MPC votes 7-2 for hike with Dhingra and Tenreyro dissenting again
- Rate setters predict shallower recession and sharper fall in inflation
- Investors bet terminal rate closer to 4-4.25% with cuts likely in 2023
By Harry Daniels
LiveSquawk News
@HarryDaniels71
02 February 2023 | 14:30 GMT
LONDON – The Bank of England followed through on market expectations and reinforced its commitment to fight inflation as it raised rates for a 10th consecutive time on Thursday. Markets have now priced in rate cuts before year-end.
As expected, the bank’s Monetary Policy Committee elected to increase its main lending rate by 50 basis points to 4.0%. However, the decision wasn’t unanimous, with both Swati Dhingra and Silvana Tenreyro preferring to keep rates unchanged.
In its accompanying statement, the central bank alluded to the possibility the bank is closer to its desired target rate and might slow the pace of future hikes, dropping key paragraphs associated with ongoing larger rate rises. Omitting the sentence: “The committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary.”
This assumption was partially down to the fact the MPC projected that Covid, Brexit, labour supply, and high energy prices had lowered the UK’s potential supply growth for 2024 and 2025.
ING’s James Smith and Antoine Bouvet wrote, “For several months now, the bank has been warning that it expects to continue hiking and that it could do so forcefully. The minutes of the last meeting confirmed that "forcefully" can be understood as meaning 50bp rate hike increments. So the fact that the bank has dropped this reference suggests any future rate rises are likely to be smaller – and that’s further reinforced by an admission that the impact of past rate hikes is still largely to feed through to the economy.”
Updated staff projections
As with every Monetary Policy Report, the bank provides staff projections covering a three-year horizon.
On growth, the bank said GDP was projected to fall slightly throughout 2023 and 2024 Q1, as still-high energy prices and the path of market interest rates weigh on spending. Staff pointed to the likelihood of a ‘technical recession’ but forecast a “much shallower profile for the decline in output than in the November Report.” Staff plotted that the economy would suffer a 1% peak-to-trough fall in GDP over five quarters compared to November’s forecast of around a 3% fall over eight quarters.
On inflation, it remarked that since the MPC’s previous forecast in November, wholesale energy prices had fallen significantly, but domestic inflationary pressures had firmed more than expected. “In the MPC’s central projections, CPI inflation declines below target in the medium term, but there continue to be significant upside risks around these projections. Whether or not those risks crystallise will be a key determinant of the economic outlook over the rest of this year.”
It also acknowledged that “Although it has started to loosen, the labour market remained tight […] and while supply is expected to remain weak, continued headwinds to demand lead to an increasing degree of economic slack emerging in the Committee’s central projection from 2023 Q2. The unemployment rate is projected to rise to around 5¼% in the medium term.”
Market plots its own course
As with the initial reaction to Wednesday's FOMC rate announcement, markets have tended to ignore any hawkish element of central bank speak and bet on a looser monetary policy eventually playing out later in the year.
Rates traders are now pricing in roughly 22 basis points for the March meeting, then a 45% chance of a 25bp hike in May. Futures markets reflect the peak is currently at 4.38% in June and foresee the risk of cuts in the second half of 2023, with broadly one 25bp cut priced by year-end.
ING’s analysts wrote, “We think the BoE will be less rapid to turn to rate cuts than the Federal Reserve, given core inflation is likely to prove stickier. That suggests policy easing is unlikely for at least a year.”
A view shared by Paul Dales, chief UK economist at Capital Economics. He remained unconvinced things will work out quite as nicely as the bank expects. “We think there’s still a good chance that continued strong wage growth and CPI services inflation will prompt the bank to raise rates to 4.50% and that a recession involving a bigger fall in real GDP of 2% will be required. What’s more, we suspect that the still subdued labour force will contribute to domestic inflation pressures lingering for some months yet (even as overall CPI inflation falls) and the Bank keeping interest rates at their peak for all of this year.
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- Bank lifts benchmark interest rate a half a point to 4.0%
- MPC votes 7-2 for hike with Dhingra and Tenreyro dissenting again
- Rate setters predict shallower recession and sharper fall in inflation
- Investors bet terminal rate closer to 4-4.25% with cuts likely in 2023
By Harry Daniels
LiveSquawk News
@HarryDaniels71
02 February 2023 | 14:30 GMT
LONDON – The Bank of England followed through on market expectations and reinforced its commitment to fight inflation as it raised rates for a 10th consecutive time on Thursday. Markets have now priced in rate cuts before year-end.
As expected, the bank’s Monetary Policy Committee elected to increase its main lending rate by 50 basis points to 4.0%. However, the decision wasn’t unanimous, with both Swati Dhingra and Silvana Tenreyro preferring to keep rates unchanged.
In its accompanying statement, the central bank alluded to the possibility the bank is closer to its desired target rate and might slow the pace of future hikes, dropping key paragraphs associated with ongoing larger rate rises. Omitting the sentence: “The committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary.”
This assumption was partially down to the fact the MPC projected that Covid, Brexit, labour supply, and high energy prices had lowered the UK’s potential supply growth for 2024 and 2025.
ING’s James Smith and Antoine Bouvet wrote, “For several months now, the bank has been warning that it expects to continue hiking and that it could do so forcefully. The minutes of the last meeting confirmed that "forcefully" can be understood as meaning 50bp rate hike increments. So the fact that the bank has dropped this reference suggests any future rate rises are likely to be smaller – and that’s further reinforced by an admission that the impact of past rate hikes is still largely to feed through to the economy.”
As with every Monetary Policy Report, the bank provides staff projections covering a three-year horizon.
On growth, the bank said GDP was projected to fall slightly throughout 2023 and 2024 Q1, as still-high energy prices and the path of market interest rates weigh on spending. Staff pointed to the likelihood of a ‘technical recession’ but forecast a “much shallower profile for the decline in output than in the November Report.” Staff plotted that the economy would suffer a 1% peak-to-trough fall in GDP over five quarters compared to November’s forecast of around a 3% fall over eight quarters.
On inflation, it remarked that since the MPC’s previous forecast in November, wholesale energy prices had fallen significantly, but domestic inflationary pressures had firmed more than expected. “In the MPC’s central projections, CPI inflation declines below target in the medium term, but there continue to be significant upside risks around these projections. Whether or not those risks crystallise will be a key determinant of the economic outlook over the rest of this year.”
It also acknowledged that “Although it has started to loosen, the labour market remained tight […] and while supply is expected to remain weak, continued headwinds to demand lead to an increasing degree of economic slack emerging in the Committee’s central projection from 2023 Q2. The unemployment rate is projected to rise to around 5¼% in the medium term.”
As with the initial reaction to Wednesday's FOMC rate announcement, markets have tended to ignore any hawkish element of central bank speak and bet on a looser monetary policy eventually playing out later in the year.
Rates traders are now pricing in roughly 22 basis points for the March meeting, then a 45% chance of a 25bp hike in May. Futures markets reflect the peak is currently at 4.38% in June and foresee the risk of cuts in the second half of 2023, with broadly one 25bp cut priced by year-end.
ING’s analysts wrote, “We think the BoE will be less rapid to turn to rate cuts than the Federal Reserve, given core inflation is likely to prove stickier. That suggests policy easing is unlikely for at least a year.”
A view shared by Paul Dales, chief UK economist at Capital Economics. He remained unconvinced things will work out quite as nicely as the bank expects. “We think there’s still a good chance that continued strong wage growth and CPI services inflation will prompt the bank to raise rates to 4.50% and that a recession involving a bigger fall in real GDP of 2% will be required. What’s more, we suspect that the still subdued labour force will contribute to domestic inflation pressures lingering for some months yet (even as overall CPI inflation falls) and the Bank keeping interest rates at their peak for all of this year.