Consensus is lacking at the Bank of England.
The BoE on Thursday kept rates on hold in a cliffhanger decision complicated (in a good way) by the release of a relatively favorable inflation report the previous day.
The vote split was a SCOTUS-like 5-4. All four dissents wanted a 15th hike. In world of “hawkish holds” and “dovish hikes,” the BoE delivered something new: The “confused hold.” Put it in the lexicon.
The bank’s efforts to forecast and corral inflation are a case study in… I don’t know. Something painful. Frustration, maybe. A case study in frustration.
“Developments in key indicators of inflation persistence have been mixed,” the MPC said Thursday, adding that officials see “increasing signs of some impact of tighter monetary policy on the labor market and on momentum in the real economy more generally.”
We might’ve seen the last hike from the BoE. They’re also running down the balance sheet (£100 billion over the next 12 months) and staff now sees the economy expanding only marginally this quarter. Growth in the back half of the year will probably be weaker than forecast, the MPC remarked.
Still, the vote split and the fact that services and core inflation remain north of 6%, suggest it’s too early to say anything definitive about the end of rate hikes. The forward guidance from the statement was ambiguous. “Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures,” the MPC said, after paying homage to the obligatory, ad nauseam “sufficiently restrictive” talking points.
The statement was littered with references to ambiguity and the impact of “volatile” categories on overall inflation. Plainly, the BoE has to be concerned about forward policy divergence with the Fed — and the read-through for sterling. This is the same dynamic that hit the euro following the September ECB meeting.
The pound hit a six-month low on Thursday.
Although the MPC wasn’t as unequivocal as the GC in telegraphing the end of hikes, the market is likely to fade the prospects for additional Bank Rate increases. That, against a Fed which kept another hike on the table in Wednesday’s dot plot and trimmed the scope of implied 2024 easing by 50bps.
Technically, Thursday’s BoE decision was a “surprise.” That’s certainly true vis-à-vis market pricing as it stood prior to the release of August’s inflation figures on Wednesday. But the meeting was a coin toss by the time the decision was handed down, and if we’re honest, nobody knows what’s going on, let alone what’s next, when it comes to the trajectory of the UK economy. Just ask the four MPC dissenters. Or the five voting for today’s hold, for that matter.
