BoE Review: Striking a Cautious Tone

The Bank of England’s (BoE) Monetary Policy Committee voted (7 to 2) to hike rates by 25bp, with Doves Dhingra and Tenreyro both voting to hold the bank rate unchanged. The market now prices the BoE to hike between 25-50bp more before reaching peak terminal rate (Chart 1).

Strong Inflation, but Services Below Forecast

Strong inflation outturns drove the decision. Headline CPI jumped +10.4% YoY, while core rose to +6.2% as the breadth of inflation widened (Chart 2). However, much of the monthly move seems to be one-off (led by food, restaurants and clothing prices), while the beat still left the all-important services inflation reading below the February MPR forecast (Chart 3).

Mixed Signals in Statement

The BoE’s statement was unsurprisingly mixed in tone, given the backdrop. It made strong note of three things:

• The exceptional rise in February inflation (albeit with the above noted caveats).
• The improved economic backdrop. The Spring Budget is expected to add +0.3% to GDP in coming years, while the Q2 GDP growth is now expected to be positive, versus the -0.4% expected in the February MPR.
• The stronger-than-expected rise in employment this year. The BoE now expects employment to grow by 0.2% in Q2 versus the previous expectation of a decline of 0.4% and for unemployment rate to be stable rather than rise.

However, it also noted the faster-than-expected decline in YoY private sector wage growth (0.1pp below MPR expectations through January, see our recent piece for more details) and the lower near-term trajectory for inflation (on the reduced EPG price cap and frozen fuel duty). Meanwhile, it also noted that household and business inflation expectations have tended to decline (Chart 4).

Summary

In the face of mixed data and significant uncertainty around markets (and the possibility of further fallout from the banking sector), the BoE has struck a cautious tone given the strong inflation data and the surprising resilience of both the UK economy and labour market. The hike was priced in, and there is not a huge amount to read into the statement that might indicate any significant change from the prior data-dependent approach. Any signs of tightening UK bank lending conditions due to the worries in the sector, of the big February inflation beat was anything other than a one-off, and of labour market weakness will be important to watch.

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.)