BANK OF ENGLAND HOLDS RATES IN THREE-WAY SPLIT
Newsflash: The Bank of England has left UK interest rates unchanged, in a rare three-way split!
Bank Rate will remain at 5.25%, a 16-year high.
That will disappoint borrowers, such as mortgage holders, hoping to see a drop in borrowing costs today.
But it’s bang in line with City forecasts.
But, the decision is not unanimous … two members of the Bank’s Monetary Policy Committee preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 5%.
The Bank says:
Six members (Andrew Bailey, Sarah Breeden, Ben Broadbent, Megan Greene, Huw Pill and Dave Ramsden) voted in favour of the proposition.
Three members voted against the proposition. Two members (Jonathan Haskel and Catherine L Mann) preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member (Swati Dhingra) preferred to reduce Bank Rate by 0.25 percentage points, to 5%.
Key events
Q: Given the stickiness of services inflation, will the ‘last mile’ of bringing inflation down be the hardest part of the battle?
Deputy governor Ben Broadbent explains that this ‘last mile’ of inflation is to do with tackling stickier domestic inflation, rather than the impact of imported energy prices.
Q: Yesterday, America’s top central banker, Jay Powell, indicated that the Federal Reserve is unlikely to be able to cut interest rates as soon as March – could the Bank of England come to a similar conclusion?
Andrew Bailey resists any temptation to copy the Fed, saying he will not speculate what the Bank might do at its next meeting.
He points out that two sets of inflation and labour market statistics will be released before the Bank’s next meeting in mid-March. They will inform the MPC’s decision.
Andrew Bailey says he will not speculate on how the Bank might change interest rates in the future.
Evidence will be assessed “exhaustively” at each BoE meeting, he adds.
Q: Is the Bank’s next move more likely to be a cut, or a hike, or are you competely neutral on that?
Andrew Bailey flashes a bit of ankle (figuratively speaking!), pointing out that the Bank has removed language that had an ‘upside bias’ on the interest rate outlook from its statement.
Q: Your forecasts suggest keeping rates on hold risks turning sluggish growth into a recession – how do you justify that?
This is a reference to a section of the Bank’s economic forecasts that show how the economy would fare with no changes to borrowing costs.
Andrew Bailey points out that the market had not expected a rate cut today, so the Bank’s decision is consistent with those expectations.
Onto questions…
Q: Given inflation is falling faster than expected, you’ve marginally increased the tightening in the economy by leaving rates on hold – how can you justify that when growth is so weak?
BoE governor Andrew Bailey says the Bank is looking at the level of ‘persistence’ of inflation, and repeats that inflation is expected to rise later this year after dropping to its 2% target this spring.
Bailey then bats the question to his deputy, Ben Broadbent….
Bailey bringing Broadbent in on the first Q is not usually a reassuring sign…
— Michael Brown (@MrMBrown) February 1, 2024
…. who denies that the BoE has effectively lifted ‘real rates’ by leaving Bank Rate on hold even though inflation has been dropping.
Broadbent argues that inflation expectations are more important than headline CPI, and that two-year interest rates are more important to the economy than overnight rates. Those two-year rates have dropped sharply in recent months, helping pull down mortgage rates.
Bailey – about 2/3 of impact of impact of prior hikes has now fed through to the economy
— Michael Brown (@MrMBrown) February 1, 2024
Touching on the 6-2-1 split at this week’s meeting, Andrew Bailey says the Bank of England will “keep under review” how long it should keep interest rates at their current level.
The Bank believes that if it keeps interest rates at 5.25% for the next three years, it’s likely that inflation would fall significantly below the 2% target, Andrew Bailey says.
However, if the Bank followed the market path for interest rates (showing four or five rate cuts this year), inflation would be above that target for most of the period, he says.
So how long will a restrictive stance be needed?
It all depends on the incoming data, Bailey explains, such as for wage growth and unemployment.
And he warns that geopolitical tensions have intensified – with shipping volumes down materially on Red Sea routes, and shipping costs up.
Here is the chart signaling that the Bank will not cut simply because target is hit in Spring, as energy cap is lowered… ex energy inflation still too high… geopolitical risks… energy prices pick up a bit in summer.
This is going to be a tough sell to some consumers,… pic.twitter.com/ncOJaF9bJE
— Faisal Islam (@faisalislam) February 1, 2024
Any decision on changing interest rates will depend on how the evidence evolves, Andrew Bailey adds.
Price stability is the foundation of a healthy economy, and we must get inflation back to the 2% target sustainably, and we will do that.
The governor then outlines that inflation may tick up in January’s report, but by March inflation could have fallen to 3%, and then fall to around 2% in April, May and June.
But (as flagged earlier), inflation is expected to rise by the end of this year, as the negative impact from lower energy prices fades.
It’s not a simple as saying the job is done when inflation returns to target in the spring, Bailey insists.