Will the Bank of England blink?
The BOE has reached a cross-roads in the policy normalization path. But why?
The Monetary Policy Committee (MPC) was split on Thursday on how much to hike rates, but also by how much rates might need to increase in future;
Indeed, the Monetary Policy Report (MPR) forecasts suggest the hiking cycle should end now; if it were to do so then inflation would be closer to target in 2025 and unemployment would be much lower;
Why then does the MPC signal that more rate increases are expected from here? Monetary policy in the UK is in need of an overhaul.
The Bank of England (BOE) has been a leader in the process of policy normalization since the pandemic.
First, the end of Asset Purchase Facility (APF) for gilt buying came before other central banks were able to taper;
Second, she was the first to initiate quantitative tightening (QT) in February.
Third, as the first major central bank to raise rates in December, initially by 15bps to 25bps, she has increased Bank Rate by 25bps at each meeting since to reach 100bps—already above the 75bps pre-pandemic peak and the highest since 2008.
So if the BOE is rethinking the path for rates from here, it could be a signal that other central banks will soon follow.
This makes understanding the outcome of last week’s MPC meeting even more important, therefore.
A split MPC
The place to begin is to notice that the MPC itself is increasingly split on where to go next.