A hawkish-ish hold - Bank of England MPC update

The Bank of England’s (BoE) Monetary Policy Committee (MPC) decided to keep rates on hold. The vote was tight though, with four (out of nine) MPC members wanting a 25bps hike.

They also made a decision on their Quantitative Tightening programme and plan a £100bn reduction in their stock of gilts over the next 12 months. That’s an increase in the pace of gilt sales from £80bn over the last 12 months when they were also unwinding their stocks of corporate bonds. This doesn’t represent much of an increase in active gilt sales though, given an increase in maturities for the BoE’s stock over the next 12 months.

The key question really is whether this will prove to be more of a lasting pause, or a ‘skip’. The minutes could support either, but it will all depend on the data. For now, I still think domestic inflationary pressure looks too strong for them not to hike once more.

They acknowledged that the decision had become more finely balanced: “…the decision on whether to increase or to maintain Bank Rate at this meeting had become more finely balanced between the risks of not tightening policy enough when underlying inflationary pressures could still prove persistent, and not placing sufficient weight on the impact of the previous tightening that was still to come through on activity and inflation.”

Consensus expectations had shifted a bit last minute: At the start of the week consensus expectations were – almost unanimously – for a 25bps hike from the BoE today…until Wednesday’s weaker-than-expected Consumer Price Index figures which saw some notable last-minute calls for a ‘hold’ decision.

Key characteristics of the August (more neutral) messaging were retained. In August, the forward guidance wording in the statement became a bit more neutral and in the press conference they’d emphasised that there were multiple paths to get inflation sustainably back to target. Bar a bit of re-ordering, the language in the statement was retained this month (“Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”)

The MPC sound a touch more downbeat on activity in the economy, noting that they expect Q3 GDP to rise only slightly and that “Underlying growth in the second half of 2023 is also likely to be weaker than expected.”

On inflation they also sounded perhaps a bit less worried, describing indicators of inflation persistence as “mixed”:

• First, they downplayed the average weekly earnings figures somewhat, saying that the recent path was “hard to reconcile with other indicators of pay growth”.
• Second, though they attribute some of the downside surprise in August inflation to volatile elements like airfares and accommodation, they pointed out that excluding those factors services inflation has been slightly weaker than expected. Apparently the staff-produced measure of underlying services inflation has begun to decline.
• Third, importantly, they also pointed to further signs of a loosening in the labour market and suggest that there are increasing signs of monetary policy passing through to the real economy.

In the context of still strong domestic inflation pressure though, I expect the Bank of England to hike rates once more by the end of the year. At their next meeting in November they will have more data to process (including a further set of GDP revisions) and have a chance to fully review their forecasts too. It is also worth pointing out that, added to those four MPC members that wanted a hike today, most of those who voted to keep rates on hold thought that the decision was “finely balanced”. That also helps skew the balance of risk (for me) in favour of one more hike. However, there is plenty of key data to be released before the November decision, starting with the flash UK Purchasing Managers Index readings tomorrow (though the MPC will have seen these already…)

What will they be particularly keeping an eye on to decide whether or not to hike again? As before, “The MPC would continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation.”

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