BoE Monitor – Be Wary Reading too Much Into Recent BoE Hawkishness

Summary

• Recent BoE hawkishness from internal members should be taken in the context of a pushback against Pill’s comments lending credibility to near-term cuts.
• Haskel’s extremely hawkish recent findings are the most interesting for their analysis. However, there are reasons to be sceptical of their importance.
• Despite some headlines, surveys continue to point towards re-anchoring inflation expectations and moderating wage growth.
• The ONS revisions to rental and second-hand car prices is unlikely to change the mood.
• The correction of labour market data in December is far more important.
• For now, we still think the BoE could cut as soon as May 2024.

Market Implications

• We still like to receive May 2024-dated SONIA.

Do Not Read Too Much Into ‘Hawkish’ BoE Comments

The BoE speakers seem to have become a lot more hawkish recently. But much of this comes as a push-back on Chief Economist Pill’s hints that market pricing for 2024 cuts was credible. There has been no real data of note to drive such a change in tone otherwise. Meanwhile, the most hawkish comments have been from the external members (Mann, Haskel and Mann).

We are hence wary that this alleged change in tone has become somewhat self-fulfilling with the media focusing on fitting a story to the market moves. For instance, Bloomberg’s take on November’s Decision Maker’s Panel survey was that it showed ‘UK Inflation Pressures Persisting’ – we find little to conclude the same).

Recent policymaker comments to focus on are (we compile the comprehensive list of comments in its usual place at the report’s end) are:

• Internal Members (read: most important):
  • Bailey: too soon to discuss cuts.
  • Pill: need to ensure monetary policy is persistent enough to bring inflation down
  • Ramsden: restrictive for a while, upside risks to inflation, not ruling out further hikes.
• External members (read: less important):
  • Haskel: rates need to be higher for longer than some are expecting – no scope for moderation anytime soon. His analysis (based on Bernanke & Blanchar’s framework) sees CPI remaining above 4% out to 2026 even if we return to pre-COVID average labour market looseness.
  • Mann: another hike is warranted, more optimistic on growth than the forecasts, but still expect it to be anaemic.
  • Greene: policy is less restrictive than thought. Doing too little on rates is the greater risk.

It is important to note that the majority of real hawkishness has come from external members (the less important voices). Mann has always been hawkish, it is only her rationale that seems to change. Meanwhile, Greene has been surprisingly hawkish since joining, but added little new to the conversation. It is Haskel’s analysis that is most interesting, particularly his incredibly hawkish conclusions based on the Bernanke/Blanchard model.

Several things should be noted on this front:

1. The idea that a return to the most loose labour market post-GFC (when unemployment was at 8%) versus a return to the average of the post-GFC period (unemployment rate around 4%) would carve off less than 1ppt of inflation over 3 years is extremely hawkish.
2. If that is to be the case, then clearly the problem is not demand, and there is little that monetary policy can do one way or another.
3. Looking at the most persistent driver of inflation in his analysis, so-called ‘initial conditions’ (based on Q4 2019 conditions) drive the most consistent rise in inflation (>4ppt by 2023 Q2), suggesting that the bulk of inflation is driven by conditions pre-dating the energy crisis. All other conclusions and the failure for inflation to return anywhere close to target are based on this driver.

On this basis, we continue to like fading the likelihood of further hikes. The December labour market correction will be incredibly important. At the current rate, a May cut remains possible, and we like to receive May 2024 SONIA on that basis.

Decision Maker Panel

The important aspects to take away in the context of concerns around services inflation and wage growth becoming sticky should be:

• Pricing expectations continue to decline (now down to +4.4% taking a 3M average) – note: pre-COVID they averaged around 2.4%. They are not back to normal – but the trend points towards normalisation (Chart 1).
• Inflation expectations 3Y out did tick back up 0.1ppt to 3.2%, but the series is not very long. Taking in the context of where consumer and market price expectations are, the downward trend seems clear (Chart 2). The short series makes it hard to assess whether this constitutes an actual break from trend: note that long-term consumer expectations for shop prices at +2.9% may sound significantly above target, but in reality it has never been below target, and rarely been below this level since 2009.
• The more important thing to watch given BoE focus are the labour market impacts:
• Wage growth looks to have stabilised at a high level. The DMP estimate of the last 12mths sits just below 7%, but has not progressed much further beyond that. The upside here is that the outlook measure (12mths ahead) is down at 5.1%. Meanwhile, alternative measures of growth (Indeed and PAYE) are much lower (Chart 3).
• Labour demand ticked up slightly, as did difficulty of hiring, but these continue to point to a re-loosening of the labour market (Chart 4).

ONS Rental and Second-Hand Car Data Revisions

The ONS has announced revisions to its private rents and second-hand cars methodology, which will enter into effect in March 2024. These will (all else equal) raise both headline and services CPI. The majority of this is expected to come from rental inflation, which has been revised up 2.3ppt in October 2023. In sum it is expected to add around 0.1-0.2ppt to headline CPI (Chart 5).

Note, the ONS does not tend to apply revisions to CPI when based on methodological improvements (except for reference rate changes, which don’t impact YoY inflation). It has not revised the series in such a way since inception, so we expect instead there will be a tick up in the reading in March 2024.

This question is whether this will concern the BoE, which is currently very focused particularly on services inflation. Rental inflation is predominantly a consequence of tightening policy (interest-only BTL mortgages passing through the higher cost of interest). It would be a surprise to see the BoE jumping on this as a sign of sticky inflation (it is policy transmission really and weighs on household ability to buy). The revision, if anything explains a bit better why UK retail sales are so suppressed vs other countries. But on the other hand it does push up what the BoE target (CPI).

Ahead, the ONS data revision/correction on 12 December is likely to be much more important for their outlook.

Hawkish Tone from the Hawks Not Too Surprising

Recent Policymaker Comments

Appendix Graphs

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)