BOE Shifts Forward Policy Guidance to Table Mountain Approach

BoE commits to restrictive policy for an extended period.

The Bank of England (BoE) has opted to keep its policy rate steady at 5.25% during Thursday’s Monetary Policy Committee (MPC) meeting. This marks the second consecutive meeting where the BoE has maintained interest rates at the same level, representing the longest stretch without changes since the rate hike cycle commenced in December 2021. The recent policy decision has strengthened my belief that the BoE's rate hike cycle may have concluded, even though the updated BoE guidance doesn't completely rule out further rate increases if deemed necessary.

Notably, a larger majority of MPC members favoured keeping rates unchanged in the meeting compared to the September gathering. Only three hawkish dissenters, MPC members Megan Greene, Jonathan Haskel, and Catherine Mann, were in the minority, a reduction from the four hawkish dissenters in the September MPC meeting. Jon Cunliffe, who had previously voted for a rate hike in September, has since been replaced by new MPC member Sarah Breeden, who aligned with the majority today in opting to maintain the current interest rates. This shift underscores that the composition of MPC members has become less inclined toward hawkish positions, diminishing the likelihood of further rate hikes.

Among the six MPC members who voted to keep rates steady today, their decision was primarily based on the observation that there had been minimal new developments in UK economic data since the September MPC meeting. They assessed that economic growth had weakened, and the labour market had continued to show signs of loosening. Furthermore, they still anticipate a significant drop in inflation in the upcoming quarters, while they downplay the significance of the acceleration in average weekly earnings, which is not reflected in a broader range of wage growth indicators. While a further rate increase remains a possibility for these six MPC members, the threshold for another rate hike now appears higher.

The BoE's updated forward guidance has shifted to signal that monetary policy is likely to remain restrictive for an extended period. Governor Bailey's comments further reinforce this stance, as he mentioned that they are closely monitoring whether additional rate hikes are necessary and sought to temper market speculation regarding early rate cuts. These comments align more with a prolonged period of unchanged rates, in line with the "Table Mountain strategy" outlined by Chief Economist Huw Pill over the summer. However, Governor Bailey also emphasized the importance of not keeping restrictive policies in place for an extended duration.

The new guidance to maintain a restrictive monetary policy for an extended period has been supported by the latest Monetary Policy Report (MPR) projections. The updated inflation projections indicate that inflation is expected to remain above the 2.0% target until the end of 2025. These projections incorporate market pricing at the time, suggesting that the policy rate will stay at around 5.25% until Q3 2024 and then gradually decline to 4.25% by the end of 2026. Additionally, the MPC determined that a greater portion of the recent unexpected strength in wages is linked to a higher medium-term equilibrium unemployment rate, resulting in increased persistence in wage and price inflation. The commitment to maintaining higher rates for an extended period underscores the BoE's uncertainty regarding whether the UK's economic challenges are adequate to bring inflation back to target.

In response to a series of disappointing economic data, the BoE has significantly revised downward its near-term growth projections. The BoE is now forecasting flat growth in Q3, a mere 0.1% expansion in Q4, followed by stagnation in 2024. The probability of a recession is estimated to be around 50%.

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