A divided Bank of England raised rates for a ninth consecutive meeting on Thursday, closing the book on a truly harrowing year even by the high standards of 2022.
The vote was 6-3 and split three ways. Two members (Dhingra and Tenreyro) voted for no change and one (Mann) for a 75bps hike. The 50bps move came on the heels of a three-quarter increase last month that counted as the largest in more than 30 years. Rates are now the highest since 2008 (figure below).
Thursday’s decision came a day after inflation figures for November showed the annual pace of headline price growth decelerated to a still sky-high 10.7% last month. That’s unacceptable under any circumstances and, as a reminder, the BoE’s remit doesn’t allow for exceptions anyway.
The bank said Thursday that although the Energy Price Guarantee (which is absolutely a proper noun now, I’m told) has “limited the rise” in inflation, household energy bills’ contribution to price growth continues to increase.
Core goods inflation has receded since last month but, as noted here on Wednesday, annual food and services inflation have accelerated. The bank said inflation “is expected to continue to fall gradually over the first quarter of 2023, as earlier increases in energy and other goods prices drop out of the annual comparison.”
The BoE’s projections for inflation in the pandemic era have proven to be misguided at every juncture. While fully acknowledging the impossibility of the task, the figure (below) is objectively unfortunate, to put it politely.
The outlook is hopelessly cloudy. The UK is grappling with rail strikes and walkouts by critical public sector workers demanding pay increases. The annual pace of wage growth for the public sector in the UK trails that of private sector employees by more than four full percentage points. One nurse, speaking to Bloomberg from a picket line Thursday, said that “At the end of every month, there’s nurses that are taking food from the patients’ cupboard. [N]obody wants to. But by the last week before they get paid, if they don’t have enough money, they take the beans from the cupboard and eat that.”
Paying public sector workers more is the “right” thing to do, which is presumably why two-thirds of voters support walkouts by nurses (support for strikes is lower for other occupations, but still hovers around 50%) but it does risk a wage-price spiral, something Mann fretted over during this month’s deliberations. “Another more forceful monetary tightening now would reinforce the tightening cycle, importantly leaning against an inflation psychology that was embedding in wage settlements and inflation expectations, and was pushing up core services and other underlying inflation measures,” the minutes said, explaining the 75bps dissent. “Pulling forward monetary action now would reduce the risk that Bank Rate would need to rise well into next year even as the economy slowed further.”
The dissents for a pause argued that “the lags in the effects of monetary policy meant that sizable impacts from past rate increases were still to come through.” Tighter financial conditions and falling real incomes pointed to a slower economy, they said.
Notably, Jeremy Hunt struck a conciliatory tone in his letter to Andrew Bailey. November’s inflation print triggered yet another exchange of letters between Bailey and the chancellor. It was the sixth consecutive such quarterly exchange but, obviously, it was Hunt’s first. The Sunak government’s commitment to central bank independence is “absolute,” Hunt said, on the way to expressing confidence in the BoE. “This government will not change the definition of price stability… and I know that the MPC will continue to take the action necessary to achieve this.” Previously, letters from the chancellor to Bailey were prescriptive in nature, calling on the bank to act “forcefully.”
Speaking of forceful tightening, the new statement retained a commitment to aggressive action in the event inflation proves persistent, but that’s just lip service to the price stability remit. The actual forward guidance said only that additional rate hikes “may” be necessary to return inflation sustainably to target. The bank omitted language pushing back on market pricing, which Bailey in November explicitly described as too aggressive.
I wish I had some special insight into the likely trajectory of inflation and growth in the UK economy, and thereby something unique to offer on the implications for monetary policy. Unfortunately, all I can say with anything approaching certainty is that the UK is destined for a prolonged bout with stagflation and that the odds of fiscal and monetary ineptitude making it worse are higher than they should be.
The note about nurses drawing down patient food rations is astonishing. I’m gob-smacked. My wife spent five years in a skilled care facility and though she didn’t waste away, (actually gained some weight) near the end of every month the quality of the food noticeably fell in a clear attempt to save money.