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The Bank of England voted 6-3 in favour of keeping rates on hold at 5.25% in a move widely expected by markets and in line with our pre-announcement call. As expected, and unlike the Fed last night, the BoE resisted the urge to pivot to a more dovish monetary policy stance.
Instead, without either a press conference or MPR to contend with, policymakers instead largely ran back November’s messaging. Despite recent signs of cooling, persistence in measures of underlying inflation have led the MPC to retain a hiking bias in their policy stance and expect rates to stay high for an extended period, consistent with recent signalling.
This should serve as a strong rebuke to markets that have gotten a little carried away with the modest softening seen across recent data releases, highlighting once again that the BoE is likely to maintain policy at a restrictive level well into 2024, even as peer central banks begin to ease.
Given the BoE’s two prior holds, and data heading into this meeting evolving largely as expected, there was little prospect of the MPC delivering anything other than a third consecutive decision to leave policy rates unchanged. Given this, focus heading into the meeting was on the vote split, and whether or not the MPC chose to pivot guidance in a more dovish direction. On the former point, the MPC once again voted 6-3 for a policy hold, with the minority preferring a 25bp hike. We had previously flagged a risk that new MPC member Megan Greene could have joined with the majority at this latest meeting given her stance has leaned progressively more dovish in recent communications, but that wasn’t the case as she continued to vote in favour of a hike.
That said, this makes sense given the hawkish overall tone of today’s communications. A shift to a 7-2 vote split would have undermined the hawkish message that the BoE is trying to project, with very little runway to keep hold of the narrative before the new year.
In terms of the guidance forthcoming in this latest decision, the MPC has contented itself with delivering more of the same. In other words, rates will stay high for an extended period and upside inflation risks see the BoE retain their tightening bias. It is notable that this comes despite headline inflation slowing sharply. October inflation printed at 4.6% YoY, below Bank staff’s forecast of 4.8% for the month and in line with their year-end projection. Weekly earnings growth also undershot the Bank’s November projections, with the private sector regular pay measure also on track to come in cooler. Headline wage growth fell from 8.0% to 7.2%, well below the 7.7% consensus predicted by markets in the latest release, with private sector regular wages easing from 7.9% to 7.3%. Albeit more volatile, single month growth slid even further, from 7.5% to 6.4%, suggesting that there is more wage growth cooling to come over future releases.
Given the backdrop of cooler inflation and greater progress in rebalancing the labour market, it is notable that the BoE passed up the opportunity to shift in a dovish direction, in line with other major central banks this week.
Wage growth is slowing sharply, and set to significantly undershoot BoE forecasts
Indeed, whilst the BoE recognised this cooling data in today’s policy summary, they also indicated that this was largely as expected, with inflationary risks remaining skewed to the upside. The inflation undershoot was largely dismissed as a function of energy prices, whilst the MPC also pointed out that the faster than expected weakening in wages only serves to bring the official indicator in line with other measures of pay growth. As we noted heading into this meeting, we expect signs of inflationary stickiness should see the BoE remain on hold much longer than peer central banks. In particular, though headline inflation has cooled sharply, measures of core inflation have not.
Given the Bank’s expressed data dependence, the BoE will want to see more progress on this front to be convinced inflation is set to sustainably return to target.
Similarly, recent PMI reports noted an uptick in the passthrough of wage growth to price growth, a key concern for policymakers worried about domestically generated inflation. Moreover, this all occurs against a growth backdrop that looks somewhat better than that of the UK’s European neighbours. Despite GDP data flatlining in the three months to October and the latest single month figure showing an outright decline of -0.3%, UK PMIs are back in positive territory and real incomes are positive.
Both factors should see growth should pick up into year-end. Ultimately, we think this means the BoE should be able to maintain a tight policy stance with only limited risk of triggering a recession.
Whilst headline inflation has dropped sharply, this is not true for measures of underlying inflation, which have only recently begun to ease
All told, today’s announcement was largely as expected, with no signs of a BoE pivot on the horizon and policymakers looking to push back on market pricing that saw two rate cuts by June prior to the announcement. This has worked to some extent, with markets modestly trimming BoE easing bets post announcement. Though with a full rate cut still fully priced for May next year, we suspect markets will ultimately be disappointed with how long they have to wait for BoE rate cuts. We continue to look for a first rate cut from the BoE in H2 2024, in light of sticky underlying inflation in the UK, and the BoE’s relatively more hawkish bias heading into the easing phase of the cycle. To the extent that this is being priced by FX markets, GBPUSD is up 0.8% today and GBPEUR has risen by 0.3%, reversing most of its underperformance over the past two days as markets had positioned themselves for a potential policy shift from the BoE on weaker wage and growth data.
We expect sterling outperformance to persist in the near-term as FX markets continue to prioritise rate differentials, which should widen in favour of the pound, before the UK’s secular stagnation leads the pound to underperform as cyclical dynamics begin to dominate.
Author:
Nick Rees, FX Market Analyst