MNI: BOE MPC Votes 8-1 To Hold Rates; Scenarios Centre Stage

The Bank of England Monetary Policy Committee voted eight-to-one to leave Bank Rate unchanged at 3.75% at its April meeting and, for the first time since the Covid shock, it did not publish a central economic projection, setting out three scenarios instead.

Chief Economist Huw Pill voted for a 25 basis point rate hike while all his colleagues, for varying reasons, sat tight on policy.

SCENARIOS

The three alternative scenarios, based on different energy price curves and varying pass through to second round effects, showed a wide range of outcomes for the policy rate, from broadly unchanged to a 5.5% peak.

Key swing voter Governor Andrew Bailey and Deputy Governors Sarah Breeden and Claire Lombardelli both said that they placed more weight on the middle scenario, Scenario B. In this, oil prices were assumed to remain somewhat higher than markets had been assuming and it suggested inflation would return to around target if market expectations for tightening were broadly met.

In Scenario B the rate projections suggested  Bank Rate would be hiked to between 3.9% and 4.4% depending on which policy rules, suggesting recent market pricing for a couple of hikes is not far off the mark.

Scenario C, the most adverse with sustained high energy prices (oil holding around USD130 per barrel, gas prices at 211p per therm and strong second round effects) showed Bank Rate rising to a peak of between 4.7% to 5.5% depending on the policy rule.

MPC DIVIDED, TILTS TO TIGHTENING

MPC members' views of which scenario was more likely were fragmented.

Pill said he saw "the risk of second-round effects in each of these scenarios as skewed to the upside."

Alan Taylor said he placed weight on the assumption that energy prices would moderate towards the end of the year and that it made sense to hold for risk management reasons, with the neutral rate at 3%.

Deputy Governor Dave Ramsden said he saw upside risks to energy prices and under Scenario B that he would consider raising Bank Rate while Lombardelli  said she placed more weight on Scenario B and that holding the policy was justified "while we learn more about the scale of the shock."

Breeden, said that she too placed most weight on B and Bailey said that it was appropriate to hold the policy rate "for now."

The previously dovish MPC member Swati Dhingra said "the balance of risks around the inflation outlook has shifted to the upside" and if the situation were to worsen, it may warrant some tightening.