EconoFACTS

March 23, 2023 | 09:03

BoE +25 bps ... Still Split, But The Gap is Narrowing

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Everything in moderation ...

As expected, the Bank of England moderated its pace of rate hikes this month, lifting its Bank Rate 25 bps to a 14½-year high of 4.25%. This was the eleventh hike in a row, but the smallest move since last summer. Even before the recent developments in global financial markets, this was not expected to be an easy decision, given that there was — and still is — plenty of debate within the Committee. Let's recap on how the vote has been going down:

November 2022—split 3 ways (7 voted for a 75 bp hike, 1 voted for 50, 1 voted for 25)

December 2022—split 3 ways (1 voted for a 75, 6 for 50, and 2 for no change)
February 2023—split 2 ways (7 voted for 50, and 2 voted for no change)
March 2023—still split 2 ways (7 voted for 25, and 2 voted for no change)

Spot the trend. The majority agreed (some more grudgingly than others, with the initials C.M.) to slow things down a bit, even as the recent economic data have beaten expectations and shown improvement in activity. Plus, there was likely more support behind the view that there is a lag to when rate hikes show up in the economy and there has already been a lot of tightening, two reasons that the two turtledoves continue to cite.

But the Bank is likely not finished, particularly as it now expects an increase in Q2 real GDP, citing comments from the Bank's agents (that activity was holding up better than the expected), and a still-tight labour market. So the economy can deal with higher rates. But inflationary pressures are still expected to "fall significantly" in Q2, and as "wage growth was likely to fall back somewhat more quickly" compared to what was expected in February. It was also noted that much of the upside surprise in the latest core CPI reading was due to clothing and footwear, and therefore, should not persist.

In any event, we're comfortable keeping our final hike of 25 bps in May, which will bring Bank Rate to 4.50%. As the BoE stated once again, "If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required."