In case you missed it, the BOE just published its monetary policy decision this week. What did Carney and his gang have to say? Here are a couple of takeaways:
No changes to current policies
As expected, the BOE’s Monetary Policy Committee (MPC) left its policies unchanged for another month:
- Bank rate remains at 0.25% (5-3 vote),
- GBP-denominated corporate bond purchases will still total up to £10 billion (8-0 vote), and
- The stock of UK government bond purchases will remain at £435 billion (8-0 vote).
So what caused all the ruckus?
Lower tolerance for high inflation
Remember that Monetary Policy Committee (MPC) members have been putting off a rate hike because it was more important for them to stimulate growth and employment than achieve their inflation targets on time.
But with inflation overshooting even their generous estimates and additional employment sapping up the economy’s spare capacity, Mark Carney and his team now have less incentive to keep rates high.
In its meeting minutes the MPC noted that 12-month inflation hit 2.9% in May – higher than the 2.7% projected in the May Inflation Report – while core inflation estimates are also revised higher.
The central bank pointed to the British pound’s weakness post-U.K. referendum as the main factor behind the increase in prices, though other inflation indicators have also increased in the past months.
The BOE currently expects inflation to “rise above 3% by autumn” and generally remain above its 2% target for as long as the weak GBP affects the prices of goods and services.
Pay growth, by contrast, remained subdued despite the faster-than-expected increase in employment. Annualized pay growth clocked in at 1.7% in the three months to April, much lower than the 2.3% growth expected in the Inflation Report, while private sector growth came in at 2.0% as expected.
There were other deets on the MPC’s meeting minutes but it basically said that:
- Inflation is expected to overshoot the BOE’s 2% target throughout the three-year forecast period;
- slack in the labour market appeared to have diminished, and demand for labour remained strong, and
- growth in business investment and net trade appeared on track to compensate for weaker consumption.
Near the end of its statement the BOE shared that (emphasis mine):
Overall, the degree of spare capacity in the economy appeared limited but, at the same time, the inflation overshoot relative to the target could be more pronounced than previously thought. This lessened the trade-off that the MPC was required to balance and, all else equal, reduced the MPC’s tolerance of above-target inflation.
With this, some members have already argued that
The withdrawal of part of the stimulus that the Committee had injected in August last year would help to moderate the inflation overshoot while leaving monetary policy very supportive.
There are 3 rate hike-teers
For the last couple of months Monetary Policy Committee (MPC) member Kristin Forbes was the lone hawk in the bunch, voting for a 25-basis point interest rate hike on the back of strong inflation and the absence of downside risks of a rate hike.
This time around, Forbes is joined by members Ian McCafferty and Michael Saunders. But before you buy the pound like there’s no tomorrow, you should also note that Forbes just voted her last vote as MPC member this month.
More importantly, according to the minutes, ALL members still agree that “any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.”
GBP bulls pounced
Market players already priced in the lack of changes to the BOE’s policies, but they were surprised that there are now THREE members calling for a rate hike.
Naturally, the unexpected hawkish votes, along with the MPC’s discussions over higher inflation and lower spare capacity attracted pound bulls across the board.
Rate hike not yet a done deal
As hawkish as the June statement sounded, there are also factors that you should remember.
First, Kristin Forbes won’t be voting next time, leaving the MPC with only two official hawks.
Next, the MPC is still REALLY concerned about wage growth and its impact on consumer spending. Heck, the team even warned that “a period of slower than expected growth could see a margin of slack re-opening.”
Near the end of their announcement, the MPC members shared what they will look for in their future decisions:
Looking ahead, key considerations in judging the appropriate stance of monetary policy are the evolution of inflationary pressures, the persistence of weaker consumption and the degree to which it is offset by other components of demand.