Yesterday the BoE had another dovish hike. See my snap analysis here just after the event. However, at first glance the BoE decision had signs of a hawkish tilt. Dissenter Cunliffe was now voting for a hike and 3 other board members were voting for a 50 bps hike. However, the detail revealed that the BoE are now expecting the UK economy to slip into negative territory in 2023. This was a dovish development that sent the GBP sliding out of the meeting and raises the prospect of a rate cut coming for the UK in 2023.
Inflation and growth a problem
The problem that the BoE has, alongside many other central banks, is how to control inflation without slowing growth. Inflation is now at 7% in the UK and expected to move higher this year. In many ways the problem of controlling inflation without slowing growth is impossible to solve. It is like saying, ‘help me draw a square circle’. So, at the latest meeting the BoE are signalling they need to contain inflation as they expect it to now peak at 10% in the UK vs 8% in the prior meeting. The surge higher in commodity and energy prices has been compounded by the Russian/Ukraine conflict. The BoE warned that the latest rise in energy future prices means that Ofgem’s utility price caps could again be substantially higher when they are reset in October 2022. This is seen as an upside risk for inflation to push even above 10%.
At the same time they are recognising that growth will be turning negative in 2023
Consumer confidence falls
Higher taxation, rising living costs, and soaring energy bills have all meant a squeeze on real household disposable incomes. Unsurprisingly the BoE stated that consumer confidence has fallenThe BoE expect this to now drag on growth, so this is why they the MPS recognised this and the medium term growth outlook has been revised down lower. 2023 growth was revised down (and negative) from 1.25% and is now -0.25% . This is what sunk the GBP post the BoE.
Rate cuts in 2023?
This means the BoE may now need to pause the hiking cycle around the summer time and potentially cut rates in 2023.. Sonia futures strip dipped lower post the BoE as they project a lower rate path ahead for the UK
You can read the full policy report here
One last thing…
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