The Bank of England kept rates on hold Thursday, as expected. The vote split was 6-3. All three dissents wanted another hike.
Policymakers are grappling with an impossibly convoluted macro conjuncture, and I think it’s fair to suggest that, at least in the near-term, stagflation risk for the UK remains quite high.
The new statement nodded to recent progress on inflation, but readers will kindly recall that the outsized decline for UK headline CPI in October was mechanical, and although service inflation receded to the slowest in months, it’s still frighteningly high at 6.6%.
The BoE didn’t dance around any of that on Thursday. “Much of the downside news [in inflation] reflected movements in components that may not provide a good signal of underlying trends in services prices and of persistence in headline inflation,” the statement said, adding that price growth in services may speed up “temporarily” in January due to base effects. It should “fall back gradually thereafter.”
The near-term path for CPI inflation is now “somewhat lower” than last month’s projections, officials said. That’s thanks in no small part to falling energy prices. As a reminder: The BoE’s inflation forecasting track record since 2021 is tragicomedy.
The figure above is a testament to the futility of macro forecasting. And also to the turmoil associated with a pandemic, a war and Liz Truss’s highly unfortunate stint as prime minister. Inflation is supposed to return to 2% by the end of 2025.
Policymakers flagged upside risks to inflation as well as to the outlook for wage growth on Thursday, but said employment growth “is likely to have softened.”
There was some tension in the BoE’s acknowledgement that “key indicators of UK inflation persistence remain elevated” and the bank’s contention that “tighter monetary policy is leading to a looser labor market and is weighing on activity in the real economy more generally.” The latter should be conducive to less in the way of “inflation persistence.” If not, you’re just engineering stagflation.
Anyway, there’s very little the BoE can do. After 14 straight hikes, the fate of the UK economy is in the hands of Lady Luck.
Have a look at the figure above then ask yourself: What can you do from there, realistically, if you’re the BoE? Keep hiking? Maybe. But what happens if you hike, say, 20 times in a row and the economy falls into a deep recession all of a sudden? Are you going to be able to justify 20 consecutive rate hikes over two years when everyone, operating with the benefit of hindsight, is hell-bent on blaming you for a macro calamity? Something tells me the “clearness” of the inflation “remit” wouldn’t save you in that scenario.
The forward guidance in the new statement plainly indicates the bank’s done raising rates, but the MPC tried to emphasize the likelihood of a long stay at terminal. “Given the significant increase in Bank Rate since the start of this tightening cycle, the current monetary policy stance is restrictive,” the statement read. “The Committee continues to judge that monetary policy is likely to need to be restrictive for an extended period of time [and] further tightening would be required if there were evidence of more persistent inflationary pressures.”
“Unlike the Fed, the Bank of England is clearly reluctant to endorse market pricing for rate cuts in 2024,” ING remarked. “The Bank has reiterated that rates need to stay restrictive for quite some time, but markets are probably right to expect cuts by next summer.”
The next policy decision is on February 1.
