LONDON - The Bank of England’s reaction function has left investors questioning how high policymakers still need to push bank rates to bring inflation back to its 2% target following Thursday’s 12th consecutive rate increase.
As expected, the bank’s Monetary Policy Committee elected to raise its main lending rate by 25 basis points to 4.5%. 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.
In a hint that the bank is not yet done adjusting rates, the accompanying statement retained the sentence that the “MPC will continue to monitor closely indications of persistent inflationary pressures.
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” it warned.
Commenting on the decision, Mike Owens, senior sales trader at Saxo, said, “With UK inflation still in double digits, it certainly seems unlikely the bank will be able to stop here, and the market is now pricing for interest rates peaking at near 5% in September 2023, which is higher than the bank’s own assumption of 4.75%.”
BoE Chief Economist Huw Pill in a now infamous comment suggested that Britons needed to accept that their earnings had fallen. And that “they’re worse off and stop trying to maintain their real spending power”.
Confronted with the comments at Thursday’s post-decision press conference, BoE Governor Andrew Bailey said, "We are very sensitive to the position of people, all people, but particularly people on lower incomes. I don't think Huw's choice of words was the right one in that sense. I have to be honest, and I think he would agree with me."
Updated staff forecasts
As per Monetary Policy Report months, revised staff economic projections spanning a three-year horizon were published alongside the rate decision.
On growth, the bank said UK GDP over much of the forecast period would be materially stronger than the February forecast. Output was expected to be broadly flat during the first half of this year. It attributed the improved outlook to better global business activity and lower energy prices.
On Inflation, it said near-term consumer prices had risen higher than February forecasts, at 10.2%. The bank reported that there had been material upside pressure from food and core goods prices. Nonetheless, according to the MPC’s latest modal projection, CPI inflation was set to decline to a little above 1% at the two and three-year horizons, materially below the 2% target.
Future path for interest rates
Trying to divine anything meaningful from the ensuing press conference is largely a futile affair, and Thursday’s event was no different.
Deutsche Bank’s Sanjay Raja noted that despite big upward revisions to GDP growth and CPI, the MPC remains no more confident about getting inflation back to target. In fact, Thursday’s minutes highlighted increased caution around the unwinding of second-round effects with uncertainty surrounding the bank’s CPI projections tracking at record levels.
Nomura’s analysts led by George Buckley wrote, “We have made no changes to our BoE view following today’s decision and MPR, namely that the bank will raise rates once more by 25bp in June and stop at a peak Bank Rate of 4.75%. We don’t see cuts until the second half of 2024.
Countering this assessment, James Smith, developed markets economist at ING, said, “We continue to feel that this will most likely mark the top in this tightening cycle, though we accept this is heavily contingent on the next set of wage and inflation data. Another hike in June is possible, though for now, it is not our base case.”
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- MPC vote 7-2 to lift rates to 4.5%
- Policymakers to remain data dependent
- Bank warns of persistent underlying inflation
- Staff upgrades growth and inflation forecasts
- Analysts split on likely interest rate path
By Harry Daniels
LiveSquawk News
@HarryDaniels71
11 May 2022 | 14:00 GMT
LONDON - The Bank of England’s reaction function has left investors questioning how high policymakers still need to push bank rates to bring inflation back to its 2% target following Thursday’s 12th consecutive rate increase.
As expected, the bank’s Monetary Policy Committee elected to raise its main lending rate by 25 basis points to 4.5%. 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.
In a hint that the bank is not yet done adjusting rates, the accompanying statement retained the sentence that the “MPC will continue to monitor closely indications of persistent inflationary pressures.
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” it warned.
Commenting on the decision, Mike Owens, senior sales trader at Saxo, said, “With UK inflation still in double digits, it certainly seems unlikely the bank will be able to stop here, and the market is now pricing for interest rates peaking at near 5% in September 2023, which is higher than the bank’s own assumption of 4.75%.”
BoE Chief Economist Huw Pill in a now infamous comment suggested that Britons needed to accept that their earnings had fallen. And that “they’re worse off and stop trying to maintain their real spending power”.
Confronted with the comments at Thursday’s post-decision press conference, BoE Governor Andrew Bailey said, "We are very sensitive to the position of people, all people, but particularly people on lower incomes. I don't think Huw's choice of words was the right one in that sense. I have to be honest, and I think he would agree with me."
As per Monetary Policy Report months, revised staff economic projections spanning a three-year horizon were published alongside the rate decision.
On growth, the bank said UK GDP over much of the forecast period would be materially stronger than the February forecast. Output was expected to be broadly flat during the first half of this year. It attributed the improved outlook to better global business activity and lower energy prices.
On Inflation, it said near-term consumer prices had risen higher than February forecasts, at 10.2%. The bank reported that there had been material upside pressure from food and core goods prices. Nonetheless, according to the MPC’s latest modal projection, CPI inflation was set to decline to a little above 1% at the two and three-year horizons, materially below the 2% target.
Trying to divine anything meaningful from the ensuing press conference is largely a futile affair, and Thursday’s event was no different.
Deutsche Bank’s Sanjay Raja noted that despite big upward revisions to GDP growth and CPI, the MPC remains no more confident about getting inflation back to target. In fact, Thursday’s minutes highlighted increased caution around the unwinding of second-round effects with uncertainty surrounding the bank’s CPI projections tracking at record levels.
Nomura’s analysts led by George Buckley wrote, “We have made no changes to our BoE view following today’s decision and MPR, namely that the bank will raise rates once more by 25bp in June and stop at a peak Bank Rate of 4.75%. We don’t see cuts until the second half of 2024.
Countering this assessment, James Smith, developed markets economist at ING, said, “We continue to feel that this will most likely mark the top in this tightening cycle, though we accept this is heavily contingent on the next set of wage and inflation data. Another hike in June is possible, though for now, it is not our base case.”