BOE - Bank of England

12-MAY-2023

BOE REVIEW: As expected, the MPC delivered a twelfth consecutive hike by raising the Bank rate by 25bps to 4.5% via a 7-2 vote split. Once again, Tenreyro and Dhingra voted for an unchanged rate on the basis that they judged prior tightening was yet to make its way into the economy. The MPC also opted to retain guidance that "if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required". As such, this disappointed some of those in the market with dovish expectations who had been hoping that the MPC would provide a signal that June would see a pause in interest rate hikes. The accompanying MPR projections showed upgrades to the inflation profile with the 2023 projection raised to 5.0% from 4.0%. Crucially, inflation in 2025 is seen materially below the MPC's 2% target at just 1% and therefore indicates that market pricing (upon which the forecasts are based) is too aggressive over the medium-term to be consistent with the BoE's goals. On the growth front, as was expected, 2023- 2025 GDP projections were upgraded with the MPC no longer forecasting a UK recession. At the follow-up press conference, Governor Bailey avoided giving markets a "directional steer on rates", stating that policy will be guided by the evidence. Bailey did note however, that the Bank "must stay the course to ensure inflation returns to 2%". Overall, after getting burned by a hot CPI report last month, the MPC is non-committal on further action, however, markets hold a hawkish bias in pricing a June hike at around 60% with the terminal rate seen around 4.87% which suggests markets expect another 25bps and are split over another one thereafter.