Today the Bank of England could make history by raising interest rates by 50bps for the first time since the Monetary Policy Committee was set up back in 1997.
In June, the vote was a split decision, and it is quite likely that this one could be too. Then, three members of the MPC voted for 50bps, and they were Michael Saunders, Catherine Mann and Jonathan Haskel, while the rest voted for 25bps.
“This will be the very least that we can expect to see today, however there is a high chance of a more aggressive move today, now that several Federal Reserve officials have reset rate expectations after the dovish interpretation of Fed chair Jay Powell’s press conference last week,” commented Michael Hewson, Chief Market Analyst at CMC Markets UK, this morning.
He pointed out that St. Louis Fed President James Bullard indicated that that we could see a funds rate of 3.75 per cent to 4 per cent by year end to prevent inflation becoming entrenched.
“With the pound already down 10 per cent year to date against the US dollar, the bank needs to act in a much more dynamic fashion to keep imported inflation in check, especially with the potential for another 50 or 75bps from the Federal Reserve next month,” Hewson noted.
In the last couple of weeks Bank of England governor Andrew Bailey said any decision to move by 50bps today was certainly on the table, but any decision to do so was by no means locked in.
“Unfortunately for Bailey his track record on guidance isn’t exactly reliable having led the markets up the garden path in November last year, only to bottle the decision and then be forced to act in December,” he added.
“Since that meeting in December the central bank has hiked by 25bps at every meeting since, with little sign that any of the increases we’ve seen so far has doing anything to slow the inflationary advance rippling through the UK economy,” Hewson continued.
In June, the central bank also gave guidance which belied their decision to raise rates by 25bps rather than the 50bps which their guidance suggested was warranted.
“As a reminder the MPC said they were prepared to act “forcefully” on inflation, if necessary, while going on to say that inflation would probably peak at 11% by year end. That guidance made the decision to only move by 25bps even more mind boggling,” Hewson explained.
“Sadly, this sort of muddled guidance is nothing new to the Bank of England and has seen the MPC come under consistent criticism over the last ten years.”
This criticism hasn’t gone unnoticed in political circles with Labour MP Pat McFadden, and a member of the Treasury Select Committee in 2014, famously labelling former governor Mark Carney the “unreliable boyfriend”
The chairman at the time, Andrew Tyrie also made the point that the bank gave was fond of giving “quite a lot of guidance, not all of it pointing in the same direction” and in those 8 years not much has changed.
The “unreliable boyfriend” was a label which stuck for the rest of Carney’s tenure and appears to have attached itself to his successor.
“Maybe there’s something in the water at Bank of England Towers?”Michael Hewson
“It is also why the Bank of England has come under fire from politicians in the recent race for the Conservative Party leadership.”
He added: “In any event, market expectation is that we will get 50bps today, and while its unlikely to be unanimous, to be safe I also have my fingers crossed, just in case.”
The Bank of England is understandably concerned about the effect that any rate rise could have on the UK economy, and it is undoubtedly slowing, however there is no easy option here, given they are already well behind the curve,” Hewson noted.
“Whatever they do the economy will slow more than it already has, but inflation is becoming a much bigger threat in the longer term, and given current trends its unrealistic to expect it to fall back to 2% much before 2024.”
Finally, the central bank will also have to consider further fiscal measures from any new Conservative Prime Minister, and with inflation likely to remain higher for longer for the bank to not raise rates by 50bps would raises all sorts of questions about its credibility.
“We could also find out how the bank intends to embark on QT, or quantitative tightening, or the sale of gilts, though that may well start in September,” Hewson concluded.