Not So Hawkish Bank Of England Holds Rates Whilst Warning Of Higher Inflation In The Months Ahead

Jeremy Batstone-Carr, European Strategist at Raymond James

 
The apparent hawkish tilt in today’s voting pattern is not reflected in the financial markets where the implied probability of a further hold at the conclusion of the next meeting on 17^th September edged up in the immediate aftermath of the decision from 53.6% to 64.3%.  The decision is more a reflection of the Bank’s desire to emphasise its reaction function, leaning hawkishly in anticipation of higher inflation in coming months whilst simultaneously comfortable with prevailing subdued price environment and a soft labour market which limits the scope for a rise in wage pressures.

Unlike the Federal Reserve’s minimalist approach to the provision of information there was no shortage of evidence in support of the Committee’s decision today.  While the accompanying statement reiterated rate-setters general concerns regarding the duration of the Middle East conflict, its impact on energy prices and the nascent threat of higher wages (which typically feed into inflation data with a considerable lag), there was little in terms of the opinions of the six members voting for no change that their positions had hardened much since 18^th June, a clear reflection of persistent and counterbalancing underlying disinflationary pressures.

In a surprise development the Bank opted not to republish and update the three scenarios it first released on 30^th April, reverting instead to a central forecast accompanied by one milder alternative and one more pessimistic one.  The central forecast sees CPI inflation hitting a peak level of 3.2% in the final quarter of the year, but drifting lower over 2027 to return to target in early 2028.  This assumption is based on the possibility, but no more than that, that the base rate might need to be raised to 4.25% but could possibly be achieved with no upward adjustment at all.