Still a high bar to hike at the BoE
Eight members of the Committee elected to keep Bank Rate at 3.75%, while one, Huw Pill, preferred a 25bp hike that would have seen Bank Rate rise to 4.00% this month. As with the headline decision, the vote split largely met consensus expectations too.
The MPC voted to leave Bank Rate unchanged at the April policy meeting, matching consensus expectations and our own house call.
Eight members of the Committee elected to keep Bank Rate at 3.75%, while one, Huw Pill, preferred a 25bp hike that would have seen Bank Rate rise to 4.00% this month. As with the headline decision, the vote split largely met consensus expectations too.
Our main takeaway from this meeting, and the accompanying guidance, is that an on-hold stance remains the base case, for now at least. We think the onus is on data, and on the evolution of conditions in the Middle East, for a majority of the MPC to justify tightening rates.
That is likely to remain a high bar over the coming months.
This latest decision was, of course, also accompanied by a Monetary Policy Report, with Bank staff analysis attracting more attention than usual, given the present uncertainties. On this point, the MPR did away with a more typical baseline projection, replacing it with three scenarios corresponding to increasingly severe energy price shocks and the likely impacts these would then entail.
Most MPC members noted in their views that they favoured the middle option, scenario B, which foresees oil prices stabilising around $80 per barrel, with modest second-round inflationary effects.
What that means for monetary policy remains open for debate; however, a point made in both the written commentary and in the press conference. Based on the weight of views presented, we are inclined to think that a majority of the MPC would prefer no change in rates over coming meetings, if scenario B were to materialise. Indeed, Governor Bailey came close to saying as such in his press conference, saying that “A lot of scenario B would be accommodated by the headroom that we already had” and “it is not the case that we’re sort of giving some sort of slightly clandestine message that interest rates are going to go up notwithstanding what we’ve decided today”.
That said, buried at the end of the MPR are a set of model projections, almost all of which indicate rate hikes in the coming months.
We think this stands at odds with the MPC’s wider rhetoric, but for a market that had been looking for validation that rates could move higher, these outturns provide ample support. Interestingly, when challenged on the path for rates, Governor Bailey noted: “Do I think therefore that the interest rate curve is in the wrong place? No, I don’t, because there are risks around this”, declining the opportunity to push back against market pricing.
Our sense here is that the MPC is willing to tolerate current market pricing, allowing rate hike expectations to tighten financial conditions temporarily, even if the committee has no intention of ultimately delivering such an outcome.
Doing so buys time to gather further evidence regarding the extent to which second-round effects are building. As noted by some MPC members, this is not likely to be a quick process.
As such, we expect Bank Rate to stay on hold for some time as the MPC gathers more information. If it becomes clear that higher energy prices are translating into broader upside price pressures, then rate rises may be necessary in time. But the onus remains on data to make that case, and as yet, the evidence is lacking.
To us, that suggests the MPC is most likely to disappoint market expectations over coming meetings.
While not an immediate negative catalyst for the pound, this outcome should still prove a slow drag on present sterling valuations.