Thu, May 26, 2022 @ 17:19 GMT
HomeAction InsightCentral Bank ViewsEyebrows Raised as BOE signaled to Hike Rates in Coming Months

Eyebrows Raised as BOE signaled to Hike Rates in Coming Months

BOE sent a hawkish message at the September meeting, noting that the majority of the members agreed that some withdrawal of stimulus should be appropriate in coming months. The key reason for the upcoming tightening is strong inflation which the central bank expects to rise above +3% in October. The market interpreted this as a signal that the historically low interest rate would be raised soon. Sterling rallied to a one-year high against the US dollar and a two-month high against the euro after the announcement. The market has now priced in over 54% chance of a rate hike in December. On the monetary policy this month, the BOE voted 7-2 to leave the Bank rate unchanged at 0.25% and unanimously to keep the asset purchase at 435B pound.

Added in the meeting statement was a hawkish reference: A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target. Yet, it stressed that any rate hike "would be expected to be at a gradual pace and to a limited extent".

On economic developments, BOE acknowledged UK demand is "growing a little in excess of this diminished rate of potential supply growth" and spare capacity has been "eroded". It also noted that "underlying pay growth has shown some signs of recovery, albeit remaining modest". As the unemployment rate has plunged to a 4-decade lower of 4.3% in the 3 months through July, pay growth is expected to pick up in coming months. On inflation, policymakers suggested that "remaining spare capacity in the economy is being absorbed a little more rapidly than expected at the time of the August Report, and that inflation remains likely to overshoot the 2% target over the next three years". Headline CPI surprisingly rose to +2.9% y/y in August, from +2.6% a month ago. The market had anticipated a milder increase to +2.8%. BOE expects inflation to rise to above 3% in October.

Michael Saunders and Ian McCafferty continued to dissent, suggesting that monetary policy at 0.5% (up +25 bps) would still be "very supportive". Yet, the rest of the Committee, including new member Dave Ramsden preferred to " undertake a full assessment of recent developments and the data released over the next couple of months, in the context of its November forecast round".

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