The Bank of England has continued its rate liftoff, announcing moments ago that it is hiking rates by 25bps to 0.5% as expected, and has officially begin the unwind of QE. However, in a major hawkish surprise, 4 policymakers - Haskel, Mann, Ramsden and Saunders - voting to hike as much as 0.5% to 0.75%, an increase that has not been seen since the bank gained independence in 1997. All policymakers agreed that further modest tightening would be needed in coming months. The increase marks the first back-to-back hike since 2004.
The Monetary Policy Committee voted by a majority of 5-4 to increase #BankRate to 0.5% and voted unanimously to begin to reduce the amount of quantitative easing. Find out more in our #MonetaryPolicyReport: https://t.co/UT5RX7qzHv pic.twitter.com/l5N4OIno5v— Bank of England (@bankofengland) February 3, 2022
Stressing its inflation-fighting mandate, the BOE said that “the remit is clear the inflation target applies at all times, reflecting the primacy of price stability in the U.K. monetary policy framework.”
The BOE also signaled the start of a new era for the 895 billion pounds of bond holdings amassed over the past decade under quantitative easing, and unanimously voted to begin the process of shrinking the balance sheet by ceasing to reinvest maturing assets. The BOE will immediately stop reinvesting the proceeds of expired gilts, allowing more than 200 billion pounds to run off by 2025, and announced plans to offload the entire 20 billion pound stock of corporate bonds by the end of 2023:
The Committee voted unanimously for the Bank of England to begin to reduce the stock of UK government bond purchases, financed by the issuance of central bank reserves, by ceasing to reinvest maturing assets. The Committee also voted unanimously for the Bank of England to begin to reduce the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, by ceasing to reinvest maturing assets and by a programme of corporate bond sales to be completed no earlier than towards the end of 2023 that should unwind fully the stock of corporate bond purchases.
The QE unwind will start in March, when 28 billion pounds of gilts mature. The bank reiterated it will start considering accelerating the process by pursuing active sales once rates hit at least 1%.
Other notable highlights from the announcement:
- Commenting on latest developments, the MPC judged that if the economy develops broadly in line with the February Report central projections some further modest tightening in monetary policy is likely to be appropriate in the coming months.
- The Committee continues to judge that there are two-sided risks around the medium-term inflation outlook primarily from wage developments on the upside and from energy and global tradable goods prices on the downside.
- The Committee will update its assessment on the balance of the risks to medium-term inflation in light of the relevant data as they emerge
- GDP growth was expected to slow to subdued rates main reason for that was the adverse impact of higher global energy and tradable goods prices on UK real aggregate income and spending.
- Inflation is expected to increase further in coming months to close to 6% in February and March, before peaking at around 7.25% in April. This projected peak is around 2% higher than expected in the November Report.
- The projected overshoot of inflation relative to the 2% target mainly reflects global energy and tradable goods prices.
- The further rise in energy futures prices meant that Ofgem’s utility price caps were expected to be substantially higher at the reset in April 2022.
- Core goods CPI inflation is also expected to rise further, due to the impact of global bottlenecks on tradable goods prices.
Looking ahead, the committee said that the extent of any further tightening in monetary policy will depend on the medium-term prospects for inflation: "The MPC judges that, if the economy develops broadly in line with the February Report central projections, some further modest tightening in monetary policy is likely to be appropriate in the coming months. The Committee continues to judge that there are two-sided risks around the medium-term inflation outlook, primarily from wage developments on the upside and from energy and global tradable goods prices on the downside. The Committee will update its assessment on the balance of the risks to medium-term inflation in light of the relevant data as they emerge."
The BoE today have laid out their cards for the most hawkish path assuming that the economy is at or close to its full potential. But what if the potential increases? Raising Bank rate beyond 75bps or 100bps may not make sense in that world... labour supply holds the key now $GBP pic.twitter.com/y1VEqPuxcJ— Viraj Patel (@VPatelFX) February 3, 2022
As noted above, BOE officials also lifted their forecasts for the peak of inflation to 7.25% in April, more than triple the BOE’s 2% target. Inflation had previously been expected to peak around 6%. They also said the labor market remains very tight. They sharply increased their wage-growth forecasting, predicting the underlying pace will hit 4.75% in the coming year. Higher energy prices added further pressure, while cost of living pressures will slow GDP growth.
Here are the bank's revised forecasts:
- Inflation in one year's time rises to 5 21% (prev. 3.40%). and at 2.15% in two-years (prev 2 23%), 1.60% in three years' (prev. 1.95%)
- GDP in 2021 +7.25% (prev. +7%); 2022 +3.75% (prev +5%); 2023 +1 25% (prev +1.5%); 2024 +1% (prev. +1%). based on market rates
- Unemployment rate 4 0% in Q4 2021 (prev. 4 5%); Q4 2022 4.1% (prev 4%); 04 2023 4.6% (prev 4.1%); Q4 2024 4.9% (prev 4.4%)
- Wage growth +4% Y/Y in Q4 2021 (prev 3 5%); Q4 2022 +3.75% Y/Y (prev. +1.25%); Q4 2023 +3% (prev.+2.25%). Q4 2024 +2.25% (prev. 2.75%)
Based on these forecasts, four officials - Dave Ramsden, Michael Saunders, Catherine Mann and Jonathan Haskel - voted to boost rates by 50 basis points, seeing the need to act faster to curb inflation expectations. The majority, including Governor Andrew Bailey, opted for the 25-basis-point rise.
Note 3 of the 4 members that voted for a 50bps hike were external. Broadbent & Bailey both voted for 25bps. Think the BoE wouldn't have wanted to send an aggressive signal with a 50bps hike but clear they want to get ahead of inflation. Fear is that this chokes to recovery $GBP https://t.co/VMo8ZQNnZL— Viraj Patel (@VPatelFX) February 3, 2022
Despite the improved outlook for wages, the BOE warned that real household incomes, after adjusting for inflation and tax rises, will shrink both this year and next. An hour before the BOE’s announcement, the U.K. energy regulator Ofgem said the energy bill for a typical household will rise 54% in April. While the BOE admitted the hike itself can do little to address those immediate price rises, they stressed it was necessary to anchor longer-term stability.
The government is preparing a multi-billion pound package of measures to mitigate the impact of rising energy bills. The measures may also bring down the headline rate of inflation. “The sharp rises in prices of global energy and tradable goods of which the U.K. is a net importer will weigh on real aggregate income and spending. This is something monetary policy is unable to prevent,” the BOE said.
The BOE is leading the way in a global tightening of monetary policy, as institutions move to tackle a rapid acceleration of prices in the aftermath of pandemic lockdowns. The U.S. Federal Reserve is expected to unleash its own rapid tightening cycle this year, and there has been speculation that may include a 50-basis-point hike. The decision also comes with the U.K. in the grip of a cost of living crisis, which will bite harder starting in April when higher taxes and energy prices hit consumers. Despite the improved outlook for wages, the BOE warned that real household incomes, after adjusting for inflation and tax rises, will shrink both this year and next.
In kneejerk response, markets were swept by an immediate hawkish reaction with GPBUSD spiking from 1.3565 to 1.3620 as traders see much more tightening in the months ahead...
... while the UK 10yr rose from 1.27% to 1.34%. In the short-end, expectations have moved forward a 1% Bank Rate to as early as May. The moves have transcended across the channel pressuring EGBs lower, in addition to US Treasuries.
6 back-to-back BoE rate hikes almost priced in. Surely only downside risks to this (albeit that's what many thought before today). Pain trade of higher short-term rates continues. Not sure how UK consumer handles higher rates + squeeze on incomes. Cue 2023 recession talk... $GBP pic.twitter.com/2OlzzWsksu— Viraj Patel (@VPatelFX) February 3, 2022