The Bank of England MPC at its November meeting Thursday kept the key bank rate at 5.25% as expected in a 6–3 split vote, and respectively lower and higher GDP growth and inflation forecasts. Changes to the key sections of the statement were minor. The only exception the BoE noting that their new forecasts suggest “policy is likely to need to be restrictive for an extended period of time.” This is supported by the BoE’s projections that see inflation only reaching the low-2s in late-2025, despite the imposed rate-path not showing a rate cut until late-2024.
The statement and MPR release had a limited impact on British assets. Gilts is outperforming on the day, and the GBP is still an underperformer among the major currencies.
The feeling in Britain is the situation seems to be out of control and the Central Bank prepared to damage Britain’s economy in the name of inflation. The moves have been devastating for the UK. mortgage holders. Retail sales recently registered their first positive quarter in 18 months, and consumer confidence had picked up.
Highlights
Bank of England announced November 2023, monetary policy decision.
- BOE keeps rates at 5.25%, per consensus
- Bank rate vote 3-6 as expected (Greene, Haskel, Mann voted to raise by 25 bps)
- Policy likely needs to be restrictive for extended period of time
- Will continue to monitor closely inflation persistence and resilience in the economy as a whole
- Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures
- Estimates UK GDP flat for Q3 2023 (previously +0.1%)
- Estimates UK GDP to be +0.1% in Q4 2023
- Inflation well above target of 2% but expected to continue to fall sharply
- Market participants had reported an increasing conviction that UK policy rates would remain ‘higher-for-longer’
- Some business surveys are pointing to a fall in GDP in Q4 2023
- But more forward-looking indicators were less pessimistic about growth prospects
The main change to the statement was the inclusion of this sentence: “ The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time.”
BOE Governor Andrew Bailey Comments
- Bailey’s press conference highlight3ed that BoE MPC did not discuss rate cuts at this week’s meeting, that’s not new (though maybe some thought dove Dhingra would bring this up).
- Bailey said that the UK’s labor market has loosened more than they projected in August
- He again pointed to private measures showing a faster slowdown of wage growth than those published by the ONS.
- The conflict in the Middle East is an upside risk to inflation, as other G10 central bankers have also said.
- We will keep rates high enough for long enough to return inflation to target
- OFGEM price cap means we can be confident about energy bills lowering inflation
- It’s important that services inflation falls steadily over next year
- There is a considerable way to go on quashing inflation
- Whether GDP growth is slightly negative or slightly positive won’t impact monetary policy
- How long restrictive stance will be needed depends on incoming data
- We have to be mindful of balance of risks between doing too little and too much
- We are making good progress on bringing inflation down
- Now some signs that the economy has started to grow more slowly, that’s to be expected
Where the UK Economy sat Heading into the BOE MPC:
Market Reaction (updated)
The statement and MPR release gave the pound a minor lift and saw gilts across the curve chop around for thirty minutes. That was until a miss in US ULC data moved markets. Halfway through Bailey’s presser the broad market rally stalled, and gilts and the GBP have underperformed. This overall leaves UK assets just moving in line with the broader market and, in relative terms, little changed to where they traded before the decision.
- GBP is a low-end performer among the major currencies, with a 0.4% gain that falls short of the EUR’s 0.8% rise on the day (GBPEUR only down 0.1% since statement).
- The 10bps drop in UK 2yr yields is much larger than that of US and German 2s (1/2bps and 3/4bps, respectively),
- From pre-statement levels UK and US 2s have both fallen ~3bps, and it’s a similar in 10s.
When BoE started this rate cycle it had been the first time since January 2009 that the rate has been higher than 1%. At its May 2022 meeting, the BoE increased the base rate to 1%.
Monetary Policy Summary, November 2023
The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 1 November 2023, the MPC voted by a majority of 6–3 to maintain Bank Rate at 5.25%. Three members preferred to increase Bank Rate by 0.25 percentage points, to 5.5%.
The Committee’s updated projections for activity and inflation are set out in the accompanying November Monetary Policy Report. These are conditioned on a market-implied path for Bank Rate that remains around 5¼% until 2024 Q3 and then declines gradually to 4¼% by the end of 2026, a lower profile than underpinned the August projections.
Since the MPC’s previous meeting, long-term government bond yields have increased across advanced economies. GDP growth has been stronger than expected in the United States. Underlying inflationary pressures in advanced economies remain elevated. Following events in the Middle East, the oil futures curve has risen somewhat while gas futures prices are little changed.
UK GDP is expected to have been flat in 2023 Q3, weaker than projected in the August Report. Some business surveys are pointing to a slight contraction of output in Q4 but others are less pessimistic. GDP is expected to grow by 0.1% in Q4, also weaker than projected previously.
The MPC continues to consider a wide range of data to inform its view on developments in labour market activity, rather than focusing on a single indicator. The increasing uncertainties surrounding the Labour Force Survey underline the importance of this approach. Against a backdrop of subdued economic activity, employment growth is likely to have softened over the second half of 2023, and to a greater extent than projected in the August Report. Falling vacancies and surveys indicating an easing of recruitment difficulties also point to a loosening in the labour market. Contacts of the Bank’s Agents have similarly reported an easing in hiring constraints, although persistent skills shortages remain in some sectors.
Pay growth has remained high across a range of indicators, although the recent rise in the annual rate of growth of private sector regular average weekly earnings has not been apparent in other series. There remains uncertainty about the near-term path of pay, but wage growth is nonetheless projected to decline in coming quarters from these elevated levels.
Twelve-month CPI inflation fell to 6.7% both in September and 2023 Q3, below expectations in the August Report. This downside news largely reflects lower-than-expected core goods price inflation. At close to 7%, services inflation has been only slightly weaker than expected in August. CPI inflation remains well above the 2% target, but is expected to continue to fall sharply, to 4¾% in 2023 Q4, 4½% in 2024 Q1 and 3¾% in 2024 Q2. This decline is expected to be accounted for by lower energy, core goods and food price inflation and, beyond January, by some fall in services inflation.
In the MPC’s latest most likely, or modal, projection conditioned on the market-implied path for Bank Rate, CPI inflation returns to the 2% target by the end of 2025. It then falls below the target thereafter, as an increasing degree of economic slack reduces domestic inflationary pressures.
The Committee continues to judge that the risks to its modal inflation projection are skewed to the upside. Second-round effects in domestic prices and wages are expected to take longer to unwind than they did to emerge. There are also upside risks to inflation from energy prices given events in the Middle East. Taking account of this skew, the mean projection for CPI inflation is 2.2% and 1.9% at the two and three-year horizons respectively. Conditioned on the alternative assumption of constant interest rates at 5.25%, which is a higher profile than the market curve beyond the second half of 2024, mean CPI inflation returns to target in two years’ time and falls to 1.6% at the three-year horizon.
The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. Monetary policy will ensure that CPI inflation returns to the 2% target sustainably in the medium term.
Since the MPC’s previous decision, there has been little news in key indicators of UK inflation persistence. There have continued to be signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally. Given the significant increase in Bank Rate since the start of this tightening cycle, the current monetary policy stance is restrictive. At this meeting, the Committee voted to maintain Bank Rate at 5.25%.
The MPC will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation. Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit. The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.
Fixed rate timebomb looms
The rise in rates has a potential impact of the monetary squeeze on the large number of households who will come off fixed-rate mortgages in the coming year. The so-called “mortgage timebomb” arises from previous government policies to help first-home buyers, such as stamp duty holidays. This prompted a bunching several years ago of only scarcely affordable house purchases on fixed rates. These rates that will expire this year. Commercial mortgage rates have jumped abruptly in recent weeks on inflation concerns, liquidity issues and BOE policy.
According to UK Finance, just over 80% of outstanding UK mortgages are fixed rate and in late-2021just as the BoE embarked on its hiking cycle 96% of new mortgages were taken out on fixed rates.
In the UK, those who took out 2-yr fixed mortgages at the time may be in for, or are already seeing, a significant increase in mortgage payments. Across all homeowners, UK Finance claims that around 800k fixed mortgage agreements end in H2-23 from a pool of 8.5mn; over the totality of 2024, they estimate that about 1.6mn deals expire. From 2.5% in late-2021, the average two-year fixed rate has climbed to just above 6% as of earlier this week, according to Moneyfacts.
“The greater share of fixed-rate mortgages means that the full impact of the increase in Bank rate to date will not be felt for some time,” the Bank admitted.
UK Chancellor Jeremy Hunt mimic’s the BOE with the fight against inflation is his priority. But if the government does offer some kind of relief to newly caught borrowers, this will undermine the Bank of England’s policy, at least for those mortgagees.
The focus on mortgage borrowing risks is a key component of the statement that anchored market expectations despite the 50bps increase. This provided an important counterweight and reinforced mortgage/indebtedness developments among the headline metrics, joining inflation and jobs data, that are a must-watch for calling the future policy path.
Source: Bank of England
From The TradersCommunity News Desk