The Bank of England kept rates on hold Thursday as expected. The vote split was hawkish.
Only Swati Dhingra wanted a cut, and even she dialed back the dovishness from last month, when she and Catherine Mann surprised markets by dissenting in favor of an upsized, 50bps move versus the quarter-point cut the bank actually delivered.
No one expected another cut at the March gathering. In fact, this decision was expected to skew hawkish. The BoE, you’re reminded, has taken a much more cautious approach to dialing back policy restriction than its developed market peers.
As the figure reminds you, Andrew Bailey’s only three cuts in, which is to say Bank Rate’s just 75bps from cycle highs.
The new statement referenced (quite specifically) US trade policy, and also Germany’s game-changing fiscal pivot. “Global trade policy uncertainty has intensified, and the United States has made a range of tariff announcements, to which some governments have responded,” the MPC said. “Other geopolitical uncertainties have also increased and indicators of financial market volatility have risen globally [while] the German government has announced plans for significant reform to its fiscal rules.”
The domestic macro picture in the UK is as murky as ever. The economy contracted in January, but inflation was 3% in the latest readout, which is to say policymakers are grappling with the prospect of stagflation. Recall that the February projections tipped a decidedly less favorable inflation trajectory despite the rate cut and dovish dissents.
New projections aren’t due until May. On Thursday, the BoE said inflation’s still seen rising to 3.75% in Q3, as illustrated above. Although price growth should “fall back thereafter, the Committee will pay close attention to any consequent signs of more lasting inflationary pressures.”
The new statement retained the “gradual and careful” language to describe the bank’s approach to any “further withdrawal of monetary policy restraint.” In other words: They’re terrified of making a mistake. The BoE, unlike the Fed, has a single-mandate.
Part of the bank’s guarded approach relates to trade policy and the likelihood of tariff-related inflation in the UK, which needs another macro shock like it needs a Russian invasion. The UK arguably had it worst among G7 nations during the pandemic and the early days of the Ukraine war. Inflation was very, very high and the growth outlook was, at times, quite dire.
During Liz Truss’s star-crossed tenure at No. 10, some market participants began to speak about the UK as an emerging market given the concurrence of rising bond yields and a weakening currency, a conjuncture which, in theory anyway, shouldn’t be present in developed economies, let alone hard currency-issuing developed economies.
The figure shows you near-term household inflation expectations in the UK with the BoE’s approval rating, which went negative for the first time ever in 2022. As you can see, Bailey still has a problem on his hands. Inflation expectations in the February poll were 3.4%, the highest in quite a while.
Headed into Thursday’s meeting, traders had priced in some odds of a third rate cut for the balance of the year on top of two fully-priced quarter-point moves. I’d expect that pricing to abate given the hawkish vote split.
All in all, the new statement read overtly wary to this observer. The MPC will “continue to monitor closely the risks of inflation persistence” and monetary policy in the UK “will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium-term have dissipated further,” the statement reiterated.
