EconoFACTS

March 21, 2024 | 08:41

BoE Is Increasingly Dovish

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

How very interesting! Not the fact the BoE left its Bank Rate at 5.25%, or the highest level since 2008, as was broadly expected, but the vote itself.

One would have thought that the uber dove, Swati Dhingra would get some company on the “it is time to cut rates” camp, but the fact that the two hawks—Catherine Mann and Jonathan Haskel—who voted for a hike over the past four meetings, threw in the towel was a brow-raiser. Both backed down and joined the majority who want to stay put.

In other words, the vote is now 8-to-1 to hold. No one is pushing for a hike anymore. The majority of the MPC is, clearly, very patient.

According to BoE Governor Bailey, they’re “not yet at the point” to cut rates but “things are moving in the right direction”. And in a nod to the latest CPI report, there are “further encouraging signs” that inflation is coming down. Wage growth has eased and some indicators that they look at also “pointed to slower moderation”. But, they are clearly not confident enough yet as “key indicators of inflation persistence remain elevated”

Our Stephen Gallo, Global FX Strategist, pointed out that the MPC's assessment of the March Budget was downbeat on the inflationary side.... "the measures would probably also boost potential supply to some extent, the implications for the Committee’s output gap projection, and hence inflationary pressures in the economy, were likely to be smaller."

So what was the reasoning for both camps?

For the majority…. Headline CPI had eased, restrictive policy was weighing on activity, and the job market was loosening up. BUT “inflation persistence remained elevated.” Services CPI was singled out again…. as there were “limited signs” that it was coming down fast. See page 3 of AM Charts yesterday…. BMO still looks for a June cut, as the Bank will have three new CPI reports to chew on by then. But May cannot be ruled out although it is debatable if one new CPI report is enough to warrant a cut.

Within the G8, there were differences in opinion on inflation, and its degree of persistence. “For all of these members, a further accumulation of evidence on inflation persistence would be required to warrant a shift in the monetary policy stance, with members differing on the extent of evidence that was likely to be needed. They would continue to consider the degree of restrictiveness of policy at each meeting.”

For the minority… again, one is the loneliest number. She is sticking to her view that waiting for more reassuring will be costly. Inflation has been coming down, demand is weak, and job vacancies are “falling sharply”.

Bottom Line: The fact that the two hawks threw in the towel is a surprise, and suggests that May cannot be ignored as a possible date to cut rates. They’ll have their new forecasts on hand, too. But if they still need more evidence, more signs, more reports, more conviction and confidence that inflation is coming down, the BoE may choose to wait until June when they much more evidence on hand to justify a move.