BOE - Bank of England

BOE - Bank of England


05-AUG-2022

BOE REVIEW: As forecast by consensus and priced by markets, the BoE delivered a 50bps hike, taking the Base Rate to 1.75%. The decision to raise rates for a 6th consecutive time was unanimous, however, there was dovish dissent from external member Tenreyro who is of the view that the Bank Rate might already have reached the level consistent with returning inflation to the 2% target in the medium term. For the other eight MPC members, the decision to raise rates by the largest magnitude in 27 years was justified by the view that "there had been indications that inflationary pressures were becoming more persistent and broadening to more domestically driven sectors".In 2023, On inflation, Q4 inflation is expected to rise to just over 13% (vs. the June forecast of slightly above 11%) on account of higher expected household energy prices. inflation is now expected to pull back to 5.5% (vs. the May forecast of 3.5%) whilst the three-year projection is seen at just 0.76%. Given that the projections are based on the market-implied rate curve, this suggests that the MPC views the current rate path as too aggressive for it to be able to attain its 2% inflation mandate. From a growth perspective, the accompanying projections were sobering reading against the current inflationary backdrop with the UK now expected to enter a recession in Q4 and last for five quarters with consumption growth expected to turn negative. Despite the growth outlook, the MPC's statement reaffirmed the committee to act "forecefully" in the face of more persistent inflationary pressures. Accordingly, Governor Bailey noted that returning inflation to 2% remains the Bank's priority and the costs of the Ukraine war will not deflect the BoE from pursuing its mandate. Furthermore, Bailey stated that tighter policy now reduces the risk of more extended and costly tightening later. For the September meeting, Bailey noted that all options are on the table for September and beyond but the 50bps increase this week does not mean the BoE is moving to a pre-determined path of hiking rates by 50bps at each meeting. As it stands, post-meeting pricing pencils in 35bps of tightening for September and a total of roughly 100bps by year-end. Analysts at ING are of the view that there is a strong possibility of a 50bps move in September but such a move could be the last from the BoE as the window to hike rates closes. Asides from the decision itself, the MPC announced that subject to a vote, the "Committee is provisionally minded to commence gilt sales shortly after its September meeting". In terms of the size, a total reduction of GBP 80bln in the first year of the scheme was "likely to be appropriate" of which GBP 40bln would be active sales.