Bottom Line: As widely expected, the BoE kept policy on hold for a second successive meeting in November. This added pause came with only a slightly clearer vote in favor of keeping Bank Rate at 5.25%, with three dissenters favouring a further 25 bp hike. A tightening bias persists as the MPC envisages upside risks to the inflation outlook albeit where these risks are still not seen preventing a below target outcome 2-3 years hence, most notably on stable policy assumptions (Figure 1). This partly reflects the GDP growth outlook having been pared by a full ppt over the forecast horizon, including a 0.5% downgrade to zero for 2024.Regardless, it is clear that the BoE does not envisage any early easing noting that ‘policy is likely to need to be restrictive for an extended period of time’.Given how restrictive the current stance is this rhetoric does not rule out some easing in the next year, especially as we think the BoE is overdoing the upside inflation risks. Asa result, we are even more of the view that policy has peaked permanently after 515 bp of tightening, dating back to December 2021. Indeed, as these downside risks materialize, the BoE will be forced to start easing from Q2 next year.
Figure 1: BoE Inflation Outlook
Source: BoE Monetary Policy Report
A Cup Less Half Full and More Half Empty
The decision this time around was no surprise and with both the decision and the policy arguments put forward by the two ‘camps’ suggesting no major differences. Instead, there were still merely different interpretations over the data, with the dissenters more of the view that ‘there was evidence of more persistent inflationary pressures’ than any division over the outlook. Importantly, there does seem to be growing wariness that the economy is seeing growing downside risks that are also partly materializing, this highlighted by survey data and the last batch of labor market numbers.
It is clear that the BoE thinks that policy moves so far have yielded only around half the likely eventual impact, this accounting for the 0.5 ppt downgrade for 2024 to zero and a cumulative downgrade of around one ppt.It is also clear that the BoE has been too optimistic about real activity data of late, this ranging from how tight the labor market has been to GDP growth.This may still be the case as the downgrade it has made to Q3 GDP (to zero in q/q) terms entails that the yet-to-be published September data rising by around 0.5% m/m!
Assessing and Estimating Inflation Risks
Even so, amid a weaker growth outlook it now perceives, the CPI forecast was lowered afresh in the November Monetary Policy Report (MPR).In the most likely, or modal, projections, based on the market-implied path for Bank Rate, CPI inflation is expected to return to the 2% target by the end of 2025 and then drop below target thereafter, as an increasing degree of economic slack reduces domestic inflationary pressures. As in previous MPRs, the MPC continued to judge that the risks around the modal inflation projection were skewed to the upside, stemming from second-round effects in domestic prices and wages and a somewhat more sluggish supply backdrop. Taking account of these risks, the mean projection which incorporates these risks sees CPI inflation at 2.2% and 1.9% at the two and three-year horizons respectively (Figure 1). In further assessing the policy outlook, projections based on constant interest rates (encompassing a higher profile than the market curve beyond the second half of 2024), envisages mean CPI inflation back to the 2% target in two years’ time, three quarters earlier than when conditioned on the market-implied path for interest rates.
BoE Projections Summary
Source: BoE MPR, (a) figures in parentheses show the corresponding projections in the August MPR. (b) Unless otherwise stated, the numbers shown in this table are modal projections (c) Four-quarter growth in real GDP, (d) Four-quarter inflation rate
No Clear Message - Deliberately!
This outlook reflects little change to the anticipated negative output gaps (Figure 2) it envisaged in the August MPR despite the weak GDP outlook as the supply side assumptions have also been pared back. Overall, with the MPC not trying (or able) to offer any clear message (specifically to markets) about policy given the uncertainties, data inconsistencies and forecast misses seen of late, the fact that the MPC sees policy being restrictive for an extended period of time does not rule out rates having both peaked and possibly being cut into 2024.Given how restrictive the current stance is this rhetoric does not rule out some easing in the next year, especially as we think the BoE is overdoing the upside inflation risks given the weaker growth backdrop and outlook.As a result, we are even more of the view that policy has peaked permanently and as these downside risks materialize, the BoE will be forced to start easing from Q2 next year.
