BoE To Resist Going Big As Economy Shows Signs Of Slowing

 

- Split vote expected to deliver quarter-point hike  

- Larger 50bps increase likely to be hotly debated 

- MPR to downgrade economic outlook  

- Rate decision set for 11.00 GMT 

- Press conference scheduled for 11.30 GMT 

 

 

By Harry Daniels  

LiveSquawk News  

@HarryDaniels71  

   

02 August 2022 | 12:00 GMT  

   

   

LONDON – The debate surrounding where restrictive policy should be will come into sharper focus at the upcoming Bank of England Monetary Policy Report, which will include the rate announcement and updated bank forecasts and operations.  

 

In a close-run poll, analysts predict the Monetary Policy Committee will lift rates by 25 basis points, with a 50 basis points running second. The sixth consecutive increase would place the main rate at 1.5%. The bank is also expected to publish a market notice setting out its plans for the unprecedented start of gilt sales or quantitative tightening.  

 

Morgan Stanley’s Bruna Skatica said that despite the clear risk of a larger hike, the US investment bank was sticking to its prediction of a uniformed move. “While a very, very close call, we see a 6-3 vote for a 25bp move and unchanged messaging on forceful action if needed, with another set of very dovish forecasts.”  

 

Other analysts appeared more certain a 50bp rise was on the cards. Reasoning that it should come as no surprise given the MPC’s prior guidance that it was “prepared to act more forcefully” if there were signs of more persistent inflation.  

 

Deutsche Bank’s Sanjay Raja predicted the bank will lift the bank rate to 1.75%. “We believe that the criteria for ‘acting forcefully’ has been met. However, as has been the case throughout the tightening cycle, we do not expect the August decision to be unanimous. We expect a 7-2 vote with two dissenters opting for a smaller 25bps hike.”  

 

In the context of global interest rates, several prominent central banks have pushed for faster, bigger hikes. Among them, the Bank of Canada hiked by 100bps recently, reacting to the more aggressive Fed tightening. Even the ECB initiated its hiking cycle with a 50bps hike.  

 

A deteriorating economic outlook

The bank’s Monetary Policy Report will update its quarterly economic projections, and many expect it to pen a gloomier scenario. Economists anticipate further downgrades will set a dovish backdrop for the MPC, with a familiar story of higher inflation, lower growth, and higher unemployment.  

 

“While 2022 GDP will almost certainly be downgraded, growth projections further out should improve relative to the bank's May projections,” Raja posited. “The near 1% of GDP in fiscal firepower (concentrated mostly in Q4-22) and drop in sterling should lift 2023 and 2024 growth, weighing on the bank's medium-term excess supply projections.”  

 

The Deutsche Bank analyst also predicted inflation would be higher for longer. “Despite slowing core goods inflation, May CPI shot up to 9.4% year-on-year — three-tenths above the bank’s May MPR projections. And while further modest tightening in monetary policy should weigh on inflation two to three years out, several factors should push inflation higher near to medium term.  

 

On the jobs market, Morgan Stanley’s Skatica said, “While the labour market is tight, we seem to be past the point of maximum tightness, with demand for labour easing and supply picking up very slowly too. We think that this slackening should help to keep a lid on private sector wage growth.”

 

Source: Citi/BoE/ONS
Size of future hikes still up for debate

The near-term path for UK interest rates continues to be on an upward trajectory according to most commentators.    

 

Citi’s Benjamin Nabarro wrote that based on the June “guidance” and recent data alone, an acceleration seems to us something of a stretch. “Instead, growth has softened. Inflation dynamics still appear well behaved. Both, we think, should lean against any notion restrictive rates are necessary at present. Given the current position of the cycle, this would also push against an outsized 50bps hike.”  

 

Deutsche’s Raja said, “If we are right on a 50bps hike, the race to neutral (~2%) should be coming to its final stages. And while we don’t expect any big changes to the bank’s forward guidance, […] we expect the MPC to temper any drastically hawkish shift in market expectations.”  

 

Whereas Skatica reasoned that timing matters for Threadneedle Street. “If the BoE has to hike faster than before, this will have to be sooner rather than later. So, in our view, it makes sense that the market now prices more for the August than the September meeting.” 

 

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