A divided BoE is still dovish in the details
The MPC voted to maintain Bank Rate at 3.75% following the July policy meeting, matching our pre-announcement call and unanimous sell-side consensus.
A 6-3 vote split might appear to lean hawkish at first glance, with Mann joining Pill and Greene to advocate for a hike this month. But the detail of the meeting minutes hints at a more dovish line of thinking emerging amongst some voters too, with none of the swing voters given any indication that a rate increase is becoming any more likely.
We place more weight on the latter points, continuing to expect no rise in Bank Rate before year-end, with an associated drag on sterling valuations.
Admittedly, we can sympathise with those inclined to read some of today’s communications as hawkish at first glance. Beyond the vote split, risks to the Bank’s central projection skew sharply to the upside, a point remarked on by most MPC members. But that, we think, needs reading in context, with a majority of the committee pointing to the lack of evidence for second-round effects, suggesting that absent evidence for such dynamics, a wait-and-see approach is more appropriate.
Indeed, this point was reinforced with unusual firmness in the press conference, which saw a series of notable interventions by Governor Bailey.
Commenting on the market-implied path for rates, he suggested that despite pricing two full rate hikes over the next 12 months, “the central view in the market that rates will stay unchanged this year, but there is a distribution of risk which puts it on the upside." That was followed by even more explicit guidance, with Bailey responding to a question on potential tightening, saying “Please do not leave this room thinking that the Bank is edging towards a hike”.
However, arguably the most telling intervention came not from Governor Bailey, but courtesy of Deputy Governor Lombardelli, widely seen as the next most hawkish member of the MPC after the three current dissenters.
She noted that "It wasn't a close judgement for me [to vote for a hold]. I think it's pretty clear, and I was pretty clear that holding rates at their current level was the right thing to do." To us, this looks like confirmation that the MPC’s swing voters require evidence of second-round effects before delivering any rate hikes.
This evidence is unlikely to be forthcoming in our view.
Growth momentum looks set to soften at the margin, demand is weak, and labour market indicators point toward further loosening. So, while elevated energy prices are likely to push headline inflation higher, we would not expect this to translate into a broadening in price pressures. That should be enough to see the BoE remain on hold over the coming months, disappointing swap-implied expectations. Markets have already moved toward such an outcome, with September rate hike odds now standing at 30%, down from 60% pre-announcement. The pound has responded to this pullback in tightening bets, slipping several tenths lower this afternoon, with more falls likely if we are right, and Bank Rate continues to remain on hold.