The Bank of England MPC at its June meeting Thursday raised the key bank rate by 25 bps from 1.00% to 1.25%, as expected. The vote was 6-3 vs 8-1 expected (Haskel, Mann, Saunders voted to raise bank rate 50 bps to 1.50%). The BoE however may act more forcibly if more persistent inflation pressures are indicated. The Bank is balancing bringing inflation under control without plunging the economy into a recession. The move came a day after the Federal Reserve raised rates by a three quarters half of a percent.
Inflation is at the highest rate for a decade, the sharpest annual incline for 10 years and well above the Bank’s 2% target. The BoE had already warned there was unlikely to be any reprieve over the winter months from soaring energy costs. The Bank of England raised its forecast for the peak of inflation this year to “slightly above” 11%. This reflects the planned increase in the energy price cap in October.
“The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary, act forcefully,” the central bank said in a statement.
It is the first time since January 2009 that the rate has been higher than 1%. At its May meeting, the BoE increased the base rate to 1%.
Highlights
Bank of England announced June 16, 2022 monetary policy decision
- BOE raises bank rate by 25 bps from 1.00% to 1.25%, as expected
- Bank rate vote 6-3 vs 8-1 expected (Haskel, Mann, Saunders voted to raise bank rate 50 bps to 1.25%)
- A rise of interest rates to 1.5% would have been the biggest rise since 1995
- Some degree of further tightening in monetary may still be appropriate in the coming months
- The BoE signaled that it would “act forcefully” if needed to prevent high inflation becoming more persistent.
- BOE forecasts UK economy will slide into recession this coming quarter
- Expects further slowdown in the UK economy, inflation to rise by 11% this year
The Bank of England was the first of its major global central bank peers to raise rates in this cycle. The Federal Reserve raised rates by a quarter of a percent at their March meeting.
The BOE’s expected move followed a surprise rate rise by the Swiss National Bank earlier Thursday. The increase from minus 0.75% to minus 0.25% was the first move higher since 2007. The SNB said further rate rises “cannot be ruled out.”
Despite the rate rise on Thursday, `1.25% the interest rate is just above that before the pandemic, when borrowing costs were set at 0.75% before the first wave spread to Britain in early 2020.
The BOE’s sequence of five rate increases in four policy meetings is its most aggressive since it was granted independence to set interest rates in mid-1997, when it embarked on four rate rises in successive meetings.
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 Crushing Economic Growth
The U.K.’s rate of inflation hit a 40-year high of 9% in April, the fastest rise in prices recorded by one of the G7 economies since the current surge began at the start of last year. The BOE expects the inflation rate to peak at more than 11% after a further jump in home energy prices that is likely to be announced in October.
The rise in rates and gloom of the economy is hitting economic growth. The U.K. economy contracted in March and April, data released Monday showed, and the BOE on Thursday said it expects the economy to shrink 0.3% over the second quarter as a whole.
It could get worse; “Faster policy tightening now would help to bring inflation back to the target sustainably in the medium term, and reduce the risks of a more extended and costly tightening cycle later,” the Bank said
The U.K. faces the weakest outlook for growth among the Group of 20 large economies, with the exception of Russia. In a report released last week, the Organization for Economic Cooperation and Development (OECD) said it expected the U.K.’s economy to stagnate in 2023, with the U.S. forecast to grow 1.2% and the eurozone by 1.6%.
Real wages are also falling behind, figures released Tuesday showed that wages rose 4.2% in the three months through April from the same period a year earlier, that left real pay down around 3.5%.
Market Reaction
Pound rose with the rise in rates with the change in guidance with the Bank of England opening the door for 0.50 per cent rate hikes in forthcoming meetings. Swap markets priced in more than 100 basis points of hikes from the BoE in the next two meetings through September, up from around 73 bps before today’s meeting.
London-listed stocks fell sharply after the Bank of England moved on rates. The FTSE 100 was down 3.06 per cent or 222.86 points to 7,050.55 in the afternoon following the announcement, and the FTSE 250 index was down 2.96 per cent or 571.03 points to 18,744.95.
Monetary Policy Summary, June 2022
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 15 June 2022, the MPC voted by a majority of 6-3 to increase Bank Rate by 0.25 percentage points, to 1.25%. Those members in the minority preferred to increase Bank Rate by 0.5 percentage points, to 1.5%.
In the MPC’s central projections in the May Monetary Policy Report, UK GDP growth was expected to slow sharply over the first half of the forecast period and, although the labour market was expected to tighten slightly further in the near term, the unemployment rate was projected to rise to 5½% in three years’ time. CPI inflation was expected to average slightly over 10% at its peak in 2022 Q4. Conditioned on the rising market-implied path for Bank Rate at that time and the MPC’s forecasting convention for future energy prices, CPI inflation was projected to fall to a little above the 2% target in two years’ time, largely reflecting the waning influence of external factors, and to be well below the target in three years, mainly reflecting weaker domestic pressures. The risks to the inflation projection were judged to be skewed to the upside at these points.
There has been relatively little news in global and domestic economic data since the May Report, although there have been significant movements in financial markets. UK-weighted global growth in 2022 Q2 appears to be broadly in line with expectations. Global inflationary pressures have remained elevated and oil prices have risen further. Equity markets have ended the period lower, while short and longer-term government bond yields have continued to rise.
UK GDP was weaker than expected in April, partly reflecting a further decline in Test and Trace activity. Bank staff now expect GDP to fall by 0.3% in the second quarter as a whole, weaker than anticipated at the time of the May Report. Consumer confidence has fallen further, but other indicators of household spending appear to have held up. Some indicators of business sentiment have weakened, although they have so far remained more resilient than indicators of consumer confidence and consistent with positive underlying GDP growth.
In the three months to April, the unemployment rate was 3.8% and employment grew by 0.5%. The inactivity rate has declined a little over recent months but is still higher than immediately before the pandemic. Recruitment difficulties have remained elevated and labour demand has remained strong. Underlying nominal earnings growth has also remained strong, and the Bank’s Agents report that bonus payments have been used to address recruitment and retention difficulties. All of these indicators remain consistent with a tight labour market.
Initial Bank staff analysis of the Government’s recent Cost of Living Support package suggests that, all else equal, it could boost GDP by around 0.3% and raise CPI inflation by 0.1 percentage points in the first year, with some upside risks around these estimates given the targeted and front-loaded nature of some of the measures.
Twelve-month CPI inflation rose from 7.0% in March to 9.0% in April, close to expectations at the time of the May Report, and triggering the exchange of open letters between the Governor and the Chancellor of the Exchequer that is being published alongside this monetary policy announcement. Inflation’s overshoot of the 2% target mainly reflects previous large increases in global energy and other tradable goods prices. The former has been greatly exacerbated by the war in Ukraine, which has also raised significantly the wholesale price of many agricultural commodities. The latter mainly reflects the impact of the pandemic, which shifted demand towards goods but also impaired and disrupted supply chains.
However, not all of the excess inflation can be attributed to global events. There has also been a role for interactions with domestic factors, including the tight labour market and the pricing strategies of firms. Consumer services price inflation, which is more influenced by domestic costs than goods price inflation, has strengthened in recent months. In addition, core consumer goods price inflation is higher in the United Kingdom than in the euro area and in the United States.
CPI inflation is expected to be over 9% during the next few months and to rise to slightly above 11% in October. The increase in October reflects higher projected household energy prices following a prospective additional large increase in the Ofgem price cap.
In the MPC’s latest forecasts in May, upward pressure on CPI inflation was expected to dissipate over time. In the main, this reflected the stabilisation of the prices of commodities, albeit at elevated levels, and other tradable goods. It also reflected the combined impact of weaker real incomes and tighter monetary policy on domestic demand. Monetary policy is also acting to ensure that longer-term inflation expectations are anchored at the 2% target.
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 also recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. The economy has recently been subject to a succession of very large shocks. Monetary policy will ensure that, as the adjustment to these shocks occurs, CPI inflation will return to the 2% target sustainably in the medium term, while minimising undesirable volatility in output.
In view of continuing signs of robust cost and price pressures, including the current tightness of the labour market, and the risk that those pressures become more persistent, the Committee voted to increase Bank Rate by 0.25 percentage points, to 1.25%, at this meeting.
The MPC will take the actions necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit. The scale, pace and timing of any further increases in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures. The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.
Source: Bank of England
From The TradersCommunity News Desk