The Bank of England MPC at its May meeting Thursday raised the key bank rate by 25 bps from 4.25% to 4.50% as expected. It was the 12th consecutive rate hike and BoE’s benchmark rate puts the cost of borrowing at the highest level since late-2008. The vote was 7-2 (Tenreyro and Dhingra voted to keep rates unchanged, similar to the last meeting). BOE governor, Andrew Bailey reiterated in his press conference the bank will adjust the bank rate as necessary to return inflation to target sustainably. He added GDP growth is still weak despite the upwards revision.
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%. Today was its 12th consecutive increase in borrowing costs which began in December 2021, although it matched the smallest rise since June last year and last month.
Bank of England announced May 11, 2023, monetary policy decision.
- BOE raises bank rate 25 bps to 4.50%, as expected
- Bank rate vote 7-2 vs 7-2 expected (Tenreyro and Dhingra voted to keep rates unchanged, similar to the last meetings)
- Further increases in bank rate may be required
- if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required
- Risks to inflation forecasts skewed significantly to the upside
- Pay growth could plateau at rates inconsistent with inflation target
- Estimates “flat” GDP for Q1 and Q2 (March forecast was -0.1% q/q for Q1)
The Bank of England was the first of its major global central bank peers to raise rates in this cycle. The interest rate before the pandemic were set at 0.75% before the first wave spread to Britain in early 2020.
The rise in borrowing costs will add further pressure on household budgets already burdened by a sharp rise in energy and food prices next month, and the prospect of higher taxes.
Inflation Too High
Inflation is in the sharpest annual incline for 10 years and well above the Bank’s 2% target.
BOE’s Bailey Comments at Press Conference (Updated):
- Food price inflation should ease but it remains uncertain
- Outlook for growth, unemployment has improved
- We have to stay the course
- Economic activity has been stronger than expected recently
- There has been greater resilience in the economy than what we anticipated
- We have good reasons to expect inflation to fall sharply from April
- We do see signs that food price inflation will start to slow
- MPC factors this into its policy decisions
- Changes are still working its way through the economy
- Will adjust bank rate as necessary to return inflation to target sustainably
- GDP growth is still weak despite upwards revision
- There is no bias in our setting of rates looking forward at this point
- Path of inflation forecast is not unreasonable given the scale of shocks
Monetary Policy Summary, May 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 10 May 2023, the MPC voted by a majority of 7–2 to increase Bank Rate by 0.25 percentage points, to 4.5%. Two members preferred to maintain Bank Rate at 4.25%.
The Committee’s updated projections for activity and inflation are set out in the accompanying May Monetary Policy Report. They are conditioned on a market-implied path for Bank Rate that peaks at around 4¾% in 2023 Q4 before ending the forecast period at just over 3½%.
There has been upside news to the near-term outlook for global activity, with UK-weighted world GDP now expected to grow at a moderate pace throughout the forecast period. Risks remain but, absent a further shock, there is likely to be only a small impact on GDP from the tightening of credit conditions related to recent global banking sector developments. Headline inflation has been falling in the United States and euro area, although core inflation measures remain elevated.
UK GDP is expected to be flat over the first half of this year, although underlying output, excluding the estimated impact of strikes and an extra bank holiday, is projected to grow modestly. Economic activity has been less weak than expected in February, and the Committee now judges that the path of demand is likely to be materially stronger than expected in the February Report, albeit still subdued by historical standards. The improved outlook reflects stronger global growth, lower energy prices, the fiscal support in the Spring Budget, and the possibility that a tight labour market leads to lower precautionary saving by households.
Although there are indications that the labour market has started to loosen, it is expected to remain tighter than in the February Report in the near term. The unemployment rate is now projected to remain below 4% until the end of 2024, before rising over the second half of the forecast period to around 4½%.
CPI inflation was 10.2% in 2023 Q1, higher than expected at the time of the February and March MPC meetings, with the upside surprise concentrated in core goods and food prices. Although still elevated, nominal private sector wage growth and services CPI inflation have been close to expectations.
CPI inflation is expected to fall sharply from April, in part as large rises in the price level one year ago drop out of the annual comparison. In addition, the extension in the Spring Budget of the Energy Price Guarantee and declines in wholesale energy prices will both lower the contribution from household energy bills to CPI inflation. However, food price inflation is likely to fall back more slowly than previously expected. Alongside news in other goods prices, this explains why the Committee’s modal expectation for CPI inflation now falls back more slowly than in the February Report.
In the MPC’s latest modal projection conditioned on market interest rates, CPI inflation declines to a little above 1% at the two and three-year horizons, materially below the 2% target. This reflects the emergence of an increasing degree of economic slack and declining external pressures that are expected to reduce CPI inflation. However, there remain considerable uncertainties around the pace at which CPI inflation will return sustainably to the 2% target. The Committee continues to judge that the risks around the inflation forecast are skewed significantly to the upside, reflecting the possibility that the second-round effects of external cost shocks on inflation in wages and domestic prices may take longer to unwind than they did to emerge. The mean CPI inflation profile, which incorporates this risk, is at or just below the 2% target in the medium term.
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. The economy has been subject to a sequence of very large and overlapping shocks. Monetary policy will ensure that, as the adjustment to these shocks continues, CPI inflation will return to the 2% target sustainably in the medium term. Monetary policy is also acting to ensure that longer-term inflation expectations are anchored at the 2% target.
The Committee has voted to increase Bank Rate by 0.25 percentage points, to 4.5%, at this meeting. In doing so the MPC is continuing to address the risk of more persistent strength in domestic price and wage setting, as represented by the upward skew in the projected distribution for CPI inflation.
The pace at which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far. Uncertainties around the global financial and economic outlook remain elevated.
The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.
The MPC will adjust Bank Rate as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit.
Source: Bank of England
From The TradersCommunity News Desk