The Bank of England MPC at its June meeting Thursday raised the key bank rate by 50 bps from 1.25% to 1.75%, as expected. The vote was 8-1 expected (Tenreyro voted to raise bank rate 25 bps to 1.50%). The BoE will be particularly alert to indications of more persistent inflationary pressures, and will, if necessary, act forcefully in response. Bank says policy is not on a pre-set path
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 July 4, 2022 monetary policy decision
- BOE raises bank rate by 50 bps from 1.25% to 1.75%, as expected
- Bank rate 9-0* vote vs 9-0 expected (*Tenreyro voted to raise rates by 0.25%)
- Labour market remains tight, domestic cost and price pressures elevated
- Estimates Q2 GDP to fall by 0.2% (June forecast was -0.3%)
- Sees Q3 GDP increasing by 0.4%
- Risks surrounding projections are exceptionally large at present
- Inflationary pressures are nevertheless expected to dissipate over time
- But there is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures
- Policy is not on a pre-set path
- BOE will be particularly alert to indications of more persistent inflationary pressures, and will if necessary, act forcefully in response
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.
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 six 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
The pound fell on the decision after a bit of a whipsaw, with cable dropping to a low of 1.2092 before keeping around 1.2100-20 levels at the moment. Price was holding around 1.2170 before the decision with the whipsaw high hitting 1.2210.
Monetary Policy Summary, August 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 3 August 2022, the MPC voted by a majority of 8-1 to increase Bank Rate by 0.5 percentage points, to 1.75%. One member preferred to increase Bank Rate by 0.25 percentage points, to 1.5%.
Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting. That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs. As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term. CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.
GDP growth in the United Kingdom is slowing. The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.
Domestic inflationary pressures are projected to remain strong over the first half of the forecast period. Firms generally report that they expect to increase their selling prices markedly, reflecting the sharp rises in their costs. The labour market has remained tight, with the unemployment rate at 3.8% in the three months to May and vacancies at historically high levels. As a result, and consistent with the latest Agents’ survey, underlying nominal wage growth is expected to be higher than in the May Report over the first half of the forecast period.
Inflationary pressures are nevertheless expected to dissipate over time. Global commodity prices are assumed to rise no further, and tradable goods price inflation is expected to fall back, the first signs of which may already be evident. Although the labour market may loosen only slowly in response to falling demand, unemployment is expected to rise from 2023. Domestic inflationary pressures are therefore expected to subside in the second half of the forecast period, as the increasing degree of economic slack and lower headline inflation reduce the pressure on wage growth. Monetary policy is also acting to ensure that longer-term inflation expectations are anchored at the 2% target.
The risks around the MPC’s projections from both external and domestic factors are exceptionally large at present. There is a range of plausible paths for the economy, which have CPI inflation and medium-term activity significantly higher or lower than in the baseline projections in the August Monetary Policy Report. As a result, in coming to its assessment of the outlook and its implications for monetary policy, the Committee is currently putting less weight on the implications of any single set of conditioning assumptions and projections.
The August Report contains several projections for GDP, unemployment and inflation: a baseline conditioned on the MPC’s current convention for wholesale energy prices to remain constant beyond the six-month point; an alternative projection in which energy prices follow their downward-sloping futures curves throughout the forecast period; and a scenario which explores the implications of greater persistence in domestic price setting than in the baseline. These are all conditioned on announced Government fiscal policies, including the Cost of Living Support package announced in May. There are significant differences between these projections in the latter half of the forecast period. However, all show very high near-term inflation, a fall in GDP over the next year and a marked decline in inflation thereafter.
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 continued to be subject to a succession of very large shocks, which will inevitably lead to volatility in output. 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.
The labour market remains tight, and domestic cost and price pressures are elevated. There is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures. In view of these considerations, the Committee voted to increase Bank Rate by 0.5 percentage points, to 1.75%, 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. Policy is not on a pre-set path. The Committee will, as always, consider and decide the appropriate level of Bank Rate at each meeting. The scale, pace and timing of any further changes 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.
In the minutes of its May 2022 meeting, the Committee asked Bank staff to work on a strategy for selling UK government bonds (gilts) held in the Asset Purchase Facility and committed to providing an update at its August meeting. Based on this analysis, the Committee is provisionally minded to commence gilt sales shortly after its September meeting, subject to economic and market conditions being judged appropriate and to a confirmatory vote at that meeting.
Source: Bank of England
From The TradersCommunity News Desk