Bank of England review: Unchanged but hikes are coming
|Key takeaways
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In line with our base case, the Bank of England kept monetary policy unchanged.
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The Bank of England signals that a rate hike will be appropriate in the coming months if data is broadly in line with expectations. Governor Andrew Bailey linked rate hikes to labour market outcomes (echoing Fed Chair Jerome Powell yesterday).
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We continue to expect three hikes next year (15bp in February 2022, 25bp in May 2022 and 25 in November 2025, so 65bp in total). Markets are pricing in approximately 90bp over the same period.
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FX: EUR/GBP moved higher on the announcement and near-term there are upside risks. We continue to target 0.83 in 12M, however.
BoE: Rate hikes are looming but more data are needed
Today’s Bank of England (BoE) monetary policy decision was definitely one of the key events this week. First and foremost, the re-pricing of the Bank of England was one of the main drivers for the sharp move higher in short-term yields. Secondly, there were many different views on what the BoE would do and say ahead of the meeting.
In line with our expectation, the Bank of England kept monetary policy unchanged, i.e. no changes to the Bank Rate (still 0.10%) and no changes to the QE programme (7-2 and 6-3 votes, respectively). It was, however, a “hawkish hold” in the sense that the BoE signals that a rate hike will be appropriate in the coming months if data are broadly in line with expectations. This supports our base case that the Bank of England will hike in February, although December cannot be ruled out. Bank of England emphasised that it is not going to hike aggressively. According to the minutes, “some modest tightening of monetary policy over the forecast period was likely to be necessary” and Governor Andrew Bailey hinted that he thinks market pricing is too aggressive.
Like other central banks, the Bank of England finds itself in a difficult situation. On one hand, inflation is high with headline inflation above 3% and core inflation close to 3%. Unlike e.g. the ECB, the BoE did not struggle to the same extent with too-low inflation and hence the room for patience with high inflation is probably lower. Inflation expectations have risen but data is mixed depending on the source. On the other hand, total employment remains subdued and real GDP is lower than in Q4 19 (and much lower than if GDP had followed the old trend path). It is, however, difficult to interpret the labour market due to a combination of a smaller labour force and many unfilled vacancies.
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