Bank of England’s Monetary Policy: The Unexpected

In a recent development, the Bank of England (BoE) has chosen to leave its monetary policy unchanged, defying some expectations. Christoph Siepmann, Senior Economist at Generali Asset Management, highlights the surprising outcome. According to Siepmann, "two Monetary Policy Committee (MPC) members still voted for a 25 bps hike, one for a 25 bps cut, while the other six decided to keep the rate." This contrasts with the anticipated consensus forecast, revealing dissent within the committee.

Inflation Forecasts and the Softening Tone of BoE

While acknowledging the likelihood of inflation falling to the 2% target in Q2 2024, the BoE remains cautious about a potential resurgence. Governor Bailey emphasized the need for more evidence, stating that "inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates." Despite the BoE's forward guidance adopting a softer tone by cutting out its tightening bias, Siepmann suggests a possible shift in interest rates, predicting a 25 bps cut in June and a total reduction of 100 bps by the end of 2024.

Unforeseen Factors Impacting UK Inflation

Siepmann delves into the surprising decline in UK headline inflation, attributing it to unexpected developments at the end of the previous year. The drop from 6.7% yoy in September to 4.6% yoy in November, and further to around 4% yoy for the rest of 2023, was mainly influenced by energy prices, decreasing at a rate of around -17% yoy. The BoE acknowledges the unforeseen nature of this disinflationary trend and anticipates a return to inflationary pressures, projecting a rate of 2¾% by the end of the current year.

In conclusion, the BoE's recent decisions and forecasts indicate a less dovish stance than initially expected. The dissent in committee votes, coupled with the cautious approach to inflation and the softening of forward guidance, suggest a nuanced outlook for the UK's monetary policy in the coming months. As Siepmann predicts potential rate cuts, the financial markets remain watchful for further developments, anticipating the impact on inflation and economic growth in the years ahead.