Please see below article from Evelyn Partners providing an update on February’s Bank of England monetary policy decision. Received this afternoon (02/02/2023)
What happened?
The Bank of England increased rates by 0.5% today at their February monetary policy meeting, which is in line with market and economic expectations. This takes the base rate to 4%, its highest level since 2008, and is the 10th consecutive increase by the Bank. The Monetary Policy Committee (MPC) voted 7-2 in favour of 50bps – 0bps respectively so policymakers continue to have diverse view on the best course for rates, although not as much as the 3-way split seen in December.
What does it mean?
The Bank also published its quarterly outlook on the economy which revealed an upgrade to growth expectations. Gas and electricity prices have roughly halved compared to their November forecasts. Better than expected data in terms of GDP (0.1% for November, relative to expectations of -0.2%), and strong wage growth led the Bank to improve its growth expectations for 2023 to -0.5% from their previous estimate of -1.5% in November. This upgrade has led to a significant reduction in the forecast depth and length of recession facing the UK, with the economy now set to contract by almost 1% over five quarters, rather than 2.9% over eight quarters.
However, in terms of inflation, there are several signs pointing to its continued persistence, which will have encouraged MPC members to make the 50bps move today. Headline inflation fell for the second month in December to a level of 10.5% YoY which was in line with market expectations, but the core measure (excluding food and energy) proved slightly stickier than expected at 6.3%. There is still tightness in the labour market, with survey measures of recruitment indicating continued difficulty in hiring. Wage growth running at 7.2% in the 3 months to November remains far above a level consistent with the Bank’s 2% CPI inflation target. In today’s statement, the Bank said, “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”, omitting the word ‘forcefully’ from a similar sentence in the previous statement.
Prior to the meeting, expectations for future increases in rates were modest – perhaps another cumulative 50bps before peaking at the June or August meetings. This represents a considerable downgrade on what markets expected in November, which was for rates to reach around 5.25%, and caused Governor Andrew Bailey to suggest they were too high. Market expectations now seem fairly in-line with the Bank.
Bottom Line
The UK economy is surprising on the upside, albeit from gloomy prior expectations. The Bank needs to weigh these prospects with the evidence that inflation in the UK continues to look stickier than in some other advanced economies. While the UK economy has little bearing on the international earners which dominate the UK equity market, it should continue to do well by virtue of its defensive sectoral exposure.
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Alex Clare
02/02/2023