MNI BOE WATCH: Future Hike More Remote Prospect After 7-2 Hold

The Bank of England voted seven-two to hold Bank Rate at 3.75% on Thursday, while stressing uncertainty over the outlook for energy prices, any second-round effects and output even with an Iran peace deal.

The voting pattern was very similar to that of April’s meeting, with only Megan Greene's vote changing as she joined Chief Economist Huw Pill in voting for a 25-basis-point hike. The majority were sceptical that material second-round effects were likely.

"The labour market continues to loosen, and signs of a weakening economy could contain inflationary pressures," the Monetary Policy Committee said in its statement, which also noted that an increase in "interest rates faced by households and businesses ... will act to reduce inflation over time."

Even after the news of a ceasefire in the Middle East, global energy prices "remain higher than pre-conflict and have continued to be volatile," the statement said.

INFLATIONARY PRESSURE

Governor Andrew Bailey said that "whatever happens in the future, the higher energy prices of the past four months mean there's already some inflationary pressure in the pipeline."

Still, after a fall in headline May CPI inflation to 2.8%, Bailey wrote in his personal paragraph that "recent inflation outturns give greater confidence that gradual underlying disinflation has continued." (See MNI INTERVIEW:UK Inflation Peaks Year End, Stays High-Sentance)

He also raised the risk posed by excessively restrictive policy.

"Our remit recognises that attempting to bring inflation back to the target too quickly may cause undesirable volatility in output ... tolerating temporarily above-target inflation as part of a return to target is an appropriate way to approach the trade-off, providing inflation expectations remain contained," he said.

According to the minutes of the June meeting, the June Market Participants Survey found median expectations were for a June hold and "thereafter, for Bank Rate to remain unchanged for the year ahead," even as market pricing continues to imply a full hike by year-end. 

Households' near-term inflation expectations had "picked up materially" in the Bank's polling with Ipsos, rising from 3.2% in February to 4.0% in May. (See MNI INTERVIEW: UK Inflation Expectations More Loosely Anchored)

SECOND-ROUND RISKS

But Deputy Governor Sarah Breeden said that "the economic environment means the chance of material second-round effects is small," though she remains "committed to acting early and decisively should material second‑round effects become likely."

Clare Lombardelli, another of the BOE's Deputy Governors, said she would react to "signals to indicate inflation would persist above target," but that tighter financial conditions continue "to weigh against the greater inflation pressures," while Swati Dhingra also did not see compelling reasons to move "pre-emptively."

Alan Taylor, who has generally voted for a lower path for Bank Rate than the committee at large, said "the yield curve shows we have tightened a lot just by holding," while "absent mechanical direct and indirect energy effects from the conflict, CPI inflation would have been at target in April.” Deputy Governor for Markets Dave Ramsden said his "reaction function will remain state-contingent on both the development of the conflict, and what that means for the outlook for the economy."

Catherine Mann believed risks tilted to the upside on inflation, but that the committee could react quickly to this materialising, as "research shows that a forceful Bank Rate decision can have a quick effect on inflation and inflation expectations."

On the contrary, Megan Greene said that a "proactive hike now in Bank Rate should help anchor inflation expectations," after referencing a personalised scenario from a recent speech that she used to claim that delaying a hike would risk embedding persistent inflation. Chief Economist Huw Pill, who has consistently voted for higher rates than the committee, voted for "prompt but modest action" to "put the MPC in a good place from which to respond to the evolution of events from here."