The Bank of England MPC at its September meeting Thursday raised the key bank rate by 50 bps from 1.75% to 2.25%, as expected. The vote was 9-0 (However Haskel, Mann, Ramsden voted for 75 bps, Dhingra voted for 25 bps). The BoE noted sterling has depreciated materially since August. Uncertainty around the outlook for UK retail energy prices has fallen after government’s energy support plan.
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. Uncertainty around the outlook for UK retail energy prices has fallen after government’s energy support plan. The Bank of England last meeting 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 in response.” 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%. From there we have seen another six raises.
Bank of England announced September 22, 2022 monetary policy decision
- BOE raises bank rate by 50 bps from 1.75% to 2.25%, as expected
- Bank rate vote 9-0* vs 9-0 expected (*Haskel, Mann, Ramsden voted for 75 bps, Dhingra voted for 25 bps)
- Sterling has depreciated materially since August
- Uncertainty around the outlook for UK retail energy prices has fallen after government’s energy support plan
- Consumer spending is likely to have peaked in this quarter
- Peak inflation is now likely to be lower than projected in August, at just under 11% in October
- Policy is not on a pre-set path
- Should the outlook suggest more persistent inflationary pressures, including from stronger demand, BOE will respond forcefully, as necessary
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, 2.25% the interest rate is only just getting above where it was 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 seven rate increases in five 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
“Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully, as necessary.”
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%.
Coming into the decision, the OIS market had fully priced the bank rate to be at 3% by November. That has now dropped to pricing in ~75% odds of 2.75% now. There have been consistent pullbacks for the 2023 meeting dates for the BOE by roughly 25 bps across the curve as well.
The pound dropped from 1.1350 to 1.1280 initially before holding around 1.1300 against the dollar. The decision today will do little in terms of helping cable sustain any mildly positive momentum against the dollar if you compare this to how the Fed was yesterday.
Monetary Policy Summary, September 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 21 September 2022, the MPC voted to increase Bank Rate by 0.5 percentage points, to 2.25%. Five members voted to raise Bank Rate by 0.5 percentage points, three members preferred to increase Bank Rate by 0.75 percentage points, to 2.5%, and one member preferred to increase Bank Rate by 0.25 percentage points, to 2%. The Committee also voted unanimously to reduce the stock of purchased UK government bonds, financed by the issuance of central bank reserves, by £80 billion over the next twelve months, to a total of £758 billion, in line with the strategy set out in the minutes of the August MPC meeting.
In the August Monetary Policy Report, the MPC noted that the risks around its projections from both external and domestic factors were exceptionally large, given the very large increase in wholesale gas prices since May and the consequent impacts on real incomes for UK households and on CPI inflation.
Since August, wholesale gas prices have been highly volatile, and there have been large moves in financial markets, including a sharp increase in government bond yields globally. Sterling has depreciated materially over the period.
Uncertainty around the outlook for UK retail energy prices has nevertheless fallen, following the Government’s announcements of support measures including an Energy Price Guarantee. The Guarantee is likely to limit significantly further increases in CPI inflation, and reduce its volatility, while supporting aggregate private demand relative to the Committee’s August projections. An additional Growth Plan announcement is scheduled to take place shortly after this MPC meeting, which is expected to provide further fiscal support, and is likely to contain news that is material for the economic outlook. Once this announcement has been made, and as part of its November MPC round, the Committee will make a full assessment of the impact on demand and inflation from all these announcements, along with other news, and determine further implications for monetary policy.
There has been some modest downside news to underlying UK GDP growth in 2022 Q3, and faster indicators and contacts of the Bank’s Agents suggest that the level of consumer spending is likely to have peaked in this quarter. There have been some indications that the demand for labour is weakening, although the labour market nonetheless tightened further over the summer, with inactivity materially higher than anticipated. Consumer services prices and nominal wages have continued to rise more rapidly than expected, although core goods price inflation has been lower than expected.
Twelve-month CPI inflation fell slightly from 10.1% in July to 9.9% in August, with the release triggering the exchange of open letters between the Governor and the Chancellor of the Exchequer that is being published alongside this monetary policy announcement. Given the Energy Price Guarantee, the peak in measured CPI inflation is now likely to be lower than projected in the August Report, at just under 11% in October. Nevertheless, energy bills will still go up and, combined with the indirect effects of higher energy costs, inflation is expected to remain above 10% over the following few months, before starting to fall back.
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 succession of very large 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.
There have been further signs since the August Report of continuing strength in domestically generated inflation. In and of itself, the Government’s Energy Price Guarantee will lower and bring forward the expected peak of CPI inflation. For the duration of the Guarantee, this might be expected to reduce the risk that a long period of externally generated price inflation leads to more persistent domestic price and wage pressures, although that risk remains material.
The labour market is tight and domestic cost and price pressures remain elevated. While the Guarantee reduces inflation in the near term, it also means that household spending is likely to be less weak than projected in the August Report over the first two years of the forecast period. All else equal, and relative to that forecast, this would add to inflationary pressures in the medium term.
In view of these considerations, the Committee voted to increase Bank Rate by 0.5 percentage points, to 2.25%, 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. 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. Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully, as necessary.
At its August meeting, the MPC had communicated that it was provisionally minded to commence gilt sales shortly after its September meeting, subject to economic and market conditions being appropriate. At this meeting, the Committee agreed that the conditions were appropriate, and voted to begin the sale of UK government bonds held in the Asset Purchase Facility shortly after this meeting.
Source: Bank of England
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