The Bank of England kept rates on hold Thursday as expected, but the dissents included one call for a cut.
The vote split was 6-3. Haskel and Mann again voted for a hike, Greene dropped her call for another increase to join the majority, while Dhingra spoke up for easing.
The statement language acknowledged a “relatively sharp” decline in headline CPI, said the labor market is loosening and described the risks to inflation as “more balanced.”
The MPC reiterated that policy needs to stay restrictive for a “sufficiently long” period such that the risk of inflation settling above 2% dissipates, but the bank said it’ll be watching the data to determine “for how long Bank Rate should be maintained at its current level.”
As a reminder that no one needs, that “current level” is 5.25%, a peak achieved through a cartoonish 14 consecutive rate hikes.
Suffice to say this was a harrowing experience for the age-old institution, which saw its public approval rating fall into negative territory for the first time as households grappled with what, on some metrics, was the worst cost-of-living crisis among G7 economies.
The new projections, released alongside Thursday’s decision, found the bank suggesting inflation will briefly return to target in Q2 (so, next quarter), before rising to 2.7% by year-end.
Before I get to the jokes, I should emphasize that the projections are contingent on implied rate paths, so what you’re actually looking at is an assessment of what the bank thinks would happen in the event rates evolved consistent with current pricing.
The BoE’s updated forecasts, contingent on the market-implied path for rates, show inflation remaining above target through Q3 2026, before slipping to 1.9% early in 2027.
“This reflects the persistence of domestic inflationary pressures, despite an increasing degree of slack in the economy,” the BoE said, explaining why inflation may now stick above target in virtual perpetuity.
The good news is that the bank’s forecasting track record is farcical even by the high standards for farce established during the pandemic era. So, if the bank says inflation will stick above target for the next three years, that may be the best contrarian indicator of all.
As a quick aside, note that in the November 2022 projections, following the Liz Truss mini-budget debacle, the BoE said inflation would flatline in Q4 2025. The February 2024 projections show CPI running at 2.5% during that same quarter. That gives you a sense of the indeterminacy on display here.
If the bank were to keep rates at current levels, inflation would fall below 2% “from 2025 Q4 onwards,” the BoE went on, adding that although risks to prices remain skewed to the upside, there was no difference this time around between the modal and mean projections across the two- and three-year horizons thanks to better balance in wage-price pressures.
Ultimately, and notwithstanding the projected persistence of above-target inflation rate path-dependent, the combination of softer guidance, allusions to two-sided risks and the dissent in favor of a cut at today’s decision, appeared to mark a shift from the MPC, with the caveat that reading the BoE tea leaves is challenging commensurate with the still maddeningly indeterminate outlook for the economy they’re trying to manage.
“We have had good news on inflation over the past few months. It has fallen a long way,” Andrew Bailey said, in a statement. “But we need to see more evidence that inflation is set to fall all the way to the 2% target and stay there before we can lower interest rates.”
Bailey on Thursday sounded a lot like his counterpart across the pond.
