The Bank of England hiked rates for a fifth consecutive meeting on Thursday, in line with market expectations.
The 25bps move was quickly derided by some as underwhelming given the scope of the UK’s inflation problem, but the UK has a growth problem too. The UK has a lot of problems right now actually, and the BoE is trying to solve one without exacerbating the others.
The vote was 6-3, with dissenters favoring (obviously) a 50bps move, which is probably coming in August. Terminal rate pricing is laughable considering the dire outlook for the economy.
Bank Rate is now above 1% for the first time since the financial crisis (figure above).
The statement was glum. The MPC referenced April’s lackluster monthly GDP print. “Bank staff now expect GDP to fall by 0.3% in the second quarter as a whole, weaker than anticipated at the time of the May Report,” the bank said, adding that “consumer confidence has fallen further” even as “other indicators of household spending appear to have held up.”
Public opinion of the bank was negative in May for the first time in modern history. Citizens aren’t enamored with “the way the Bank of England is ‘doing its job to set interest rates to control inflation,'” to quote the survey language.
Read more: Crisis-Battered Bank Of England Stares Into Dark Abyss
This is a very difficult spot. I can’t emphasize that enough. The UK is experiencing an acute cost of living crisis and new Brexit bickering with Brussels threatens to undermine the already tenuous projection of solidarity in the face of Russia’s war in Ukraine.
The bank’s inflation forecasts have proven disastrously wrong. Less than a year ago, the BoE projected inflation would be around 2.5% right now. Instead, it’s 9%. The more comprehensive measure is near 8% (figure below).
As is the case in the US and across developed economies, monetary policy is constrained in its capacity to deal with the problem by the outsized impact of exogenous shocks, including and especially soaring energy costs, lingering supply chain frictions and food shortages tied to the conflict in Ukraine.
At the same time, the UK economy is seen underperforming peers, which means additional rate hikes risk triggering a painful recession. Just this week, Tim Congdon warned the BoE should stop hiking now ahead of a likely downturn next year.
This is a no-win situation for policymakers. Inflation could head into the double-digits, especially if there’s another big Ofgem hike, and a recession is all but a foregone conclusion.
The BoE endeavored to sound brave Thursday. “The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response,” the June statement said.
Readers will forgive my fatalistic cadence: There’s nothing they can do. Inflation will persist in the UK for what’ll certainly seem like “the foreseeable future” to average people, and additional tightening from the BoE will do little to help, while raising the odds of a recession that everyone sees but them.