Monetary Policy & Inflation | UK
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Summary
- The BoE’s March meeting aligned with our expectation, albeit with less dovish voting. We read little into this.
- The bar is high for data to prevent quarterly cuts.
- However, by August, we expect fiscal tightening, labour market loosening and soft core services inflation will push the BoE to accelerate cuts.
- February inflation will struggle to change the story given one-offs still dominate.
Market Implications
- We remain long SFIZ5, targeting 96.4.
A Pretty BoEring Meeting
Thursday’s BoE meeting aligned with our expectation, leaving the bank rate at 4.5% and the tone of the statement largely unchanged from February. A less dovish voter pattern proved a big(ish) surprise, with Mann’s vote for no cut puzzling. Apparently, she saw 4.25% as the appropriate rate in February but now sees it as 4.5%.
In brief, the MPC:
- Voted 8:1 for no cut, with Dhingra supporting a 25bp cut.
- Kept statements on disinflation and policy unchanged.
- Added a comment on US policy uncertainty and German fiscal reform.
- Acknowledged the GDP beat but maintained that outlook was weak (as expected).
- Noted the inflation beat but noted domestic prices were still moderating (as expected).
- Stuck to the ‘gradual and careful’ approach (as expected).
On the voter pattern: we cautioned against overinterpreting a more dovish pattern, and the same applies to a less dovish one. BoE consensus appears to be converging to quarterly cuts.
The minutes highlighted that the labour market is still in balance (as we expected, based on the latest labour market print) and included two interesting points:
- Early employment survey indicators are modestly deteriorating. The BoE will watch late-stage indicators (such as, redundancy and unemployment rates) over the coming months.
- They noted employment composition was supporting wage growth (this is clearest in the declines in low-paid accommodation and catering employment).
At May’s meeting, they will look at two scenarios: one on demand weakness (dovish) and the other on supply weakness (hawkish). We think the former is more likely, but the fact they intend to publish on both is evidence of their uncertainty.
In an uncertain economic, labour market and inflation situation, we see them sticking to quarterly cuts, with a relatively high bar for them changing this in the near term. But we still expect they will accelerate by August (when they have more clarity on government spending cuts, fiscal policy impacts and inflation one-offs). Therefore, we remain long SFIZ5, targeting 96.4 (Chart 1).
February Inflation Unlikely to Change the Tone
January inflation beat expectations, largely on strong food and rental price rises.
Into February, the market is looking for +2.9% in headline, +3.6% in core and +4.9% in services. This sits about in line with the BoE’s estimates and seems reasonable.
Therefore, we expect the outturn to minimally impact the BoE’s outlook. When the employer NIC and minimum wage rise will begin to be passed through is uncertain (they hit in April), as pre-emptive price rises are likely.
Given the expectation for near-term strong prints, the BoE reaction function is probably more reactive to an undershoot, but we do not expect this to materialise.
Given the recent food beat, there may be some seasonal retracement. Yet part of this beat could be down to the employer NIC pass-through from wage costs by supermarkets.
The detail will be key. Our headline forecast now largely aligns with the BoE’s, but we see one-offs as playing a far greater role than they do. Looking ahead, we expect that the key core goods and wage-intensive services sector inflations tend towards 2% (Chart 3).