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Our views 21 March 2024

Bank of England: On hold, but no-one voting to hike… shuffling towards a rate cut

5 min read

As expected, the Monetary Policy Committee (MPC) again voted to keep rates on hold at 5.25%. There was, however, a shift in the vote with Catherine Mann and Jonathan Haskel dropping their votes to hike rates and joining the pack in terms of voting to keep rates on hold. Swati Dinghra continued to vote for a cut.

The language in the minutes had already become more dovish in February. They’d started addressing the question of when to cut rates and no longer referred to the decision on whether to hold or hike rates as “finely balanced.” This time they also added a clarification around their discussion about rates needing to be restrictive for an extended period: “The Committee recognised that the stance of monetary policy could remain restrictive even if Bank Rate were to be reduced, given that it was starting from an already restrictive level.”

They still want more evidence before cutting

They have been wanting (along with other central banks) more confidence/evidence before cutting rates. That message was repeated in the minutes today where, for all of those voting to keep rates on hold, “a further accumulation of evidence on inflation persistence would be required to warrant a shift in the monetary policy stance.” Governor Andrew Bailey in separate comments, said: “We're not yet at the point where we can cut interest rates, but things are moving in the right direction.”

Some of those voting to keep rates on hold sound a lot closer to cutting rates than others

Those voting to keep rates unchanged, still feel that “key indicators of inflation persistence remain elevated”. However, the minutes are clear that there is a “range of views” among these members about the extent to which the risks from persistent inflationary pressures had receded. These MPC members seem to have quite different interpretations of the data: “At one end of this range, developments…suggested that the restrictive stance of policy and the unwinding of second-round effects…were having a material impact in reducing the more persistent and slower-moving components of inflation.” But, “At the other end of this range, wage growth remained too high and was expected to moderate only slowly, as reflected in the Agents’ latest intelligence. There were limited signs so far that services price inflation would return to a target-consistent pace sufficiently rapidly, with evidence of diminishing second-round effects still tentative.” This range of views from the ‘on hold’ group wasn’t so apparent last time. It does suggest though, that there is probably a camp of MPC members relatively close to cutting rates and a camp very firmly on hold for now. It isn’t clear how big each group of MPC members is though.

The general discussion leaned dovish

The general discussion around the data seemed leaned dovish…but not too far. A later paragraph in the minutes summarising inflation-related developments notes the fall in services inflation, the easing in short-term inflation expectations and that nominal wage growth had moderated across a range of measures. However, for example, in the earlier section discussing pay growth, although they summarise that “against the backdrop of easing labour market tightness and receding inflation expectations, most indicators of pay growth had declined”, they add, they had “remained elevated”. Then, for example, they noted that some shorter-term measures of wage growth had eased, but “some forward-looking indicators…pointed to slower moderation.”

Shuffling towards a rate cut

Guidance for coming meetings is limited, but the same indicators continue to be stressed by the Bank: indicators of labour market tightness, wage growth and services price inflation. Taking into account the vote shift, the language in the minutes and their take on recent data, they continue to shuffle towards a rate cut. The balance of risk remains skewed towards an earlier rate cut than my central case forecast for the third quarter.


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