BoE Governor Bailey used a keynote speech today to underline that the MPC made clear change in its policy setting function last month, moving away from a presumption of further hiking unless there as clear evidence of persistent inflationary pressures intensifying. In other words, the MPC became more data driven effectively. In this regard, and in his opinion, the data backdrop since the early February meeting has been mixed, thereby implying still no prerequisite that further hiking is needed, albeit with some divergences in opinion among committee members likely to still be the case. We still think policy may have peaked despite market thinking to the contrary and wonder to what degree these comments are deliberately aimed at influencing market thinking which may have over-reacted to some recent data releases.
At the Monetary Policy Committee’s February meeting, Governor Bailey underscored that the MPC made a very deliberate change to the way it described its view of the policy outlook. It moved away from what had effectively been a presumption at previous meetings that further increases in Bank Rate would be required. This seemingly was partly a result of the Committee’s forecast that headline consumer price inflation was projected to fall sharply over the rest of year, more so in the second half.Even so, it still recognized that further tightening would be required if there were to be evidence of more. In that context, we made clear that we have to keep a very close eye on domestic inflationary pressures reflecting a tight labour market.
Bailey’s reading of the evidence since the early-February meeting – the data we have had for economic activity, the labour market, and inflation – is that the economy is evolving much as it expected. Inflation has been slightly weaker, and activity and wages slightly stronger, though I would emphasise ‘slightly’ in both cases. All of which means that Bailey cautions against suggesting either that the MPC is done with increasing Bank Rate, or that it will inevitably need to do more. Some further increase in Bank Rate may turn out to be appropriate, but nothing is decided. The incoming data will add to the overall picture of the economy and the outlook for inflation, and that will inform our policy decisions.
