Commentary Directory

The Bank of England Pauses in a Near Split Decision

Jacob Hess
September 21, 2023

This morning, the Bank of England maintained its Bank Rate at 5.25%, ending a string of rate hikes that started back in December 2021. The pause was not without controversy as the BoE Monetary Policy Committee (MPC) as the vote was passed by slim margin of 5-4. The dissenting minority wanted a 25 bps rate hike. The announcement also included the decision to reduce to slow the rate of quantitative easing. Specifically, the MPC voted to reduce the amount of UK government bond purchases over the next 12 months by -£100 billion to £658 billion. This announcement comes after UK CPI inflation rates surprised to the downside on lower-than-expected services inflation.

From Bank of England

It appears that the reason for the pause was likely related to that inflation release which may have caused an abrupt reassessment of the inflation risks. The MPC noted that the decline in annual inflation from 7.9% in June to 6.7% in August was “0.4 percentage points below expectations at the time of the Committee’s previous meeting” with both goods and services CPI inflation surprising to the downside. However, it also notes that these outsized declines were caused by the airfares & accommodation segment which “tend to be volatile over the summer holiday period.” In the next paragraph, it retreats from its admission of progress and states that services inflation “is projected to remain elevated in the near term.”

On the labor market and wages, the MPC says that it has started to see the impact of higher rates. This is likely referring to the recent rise in the unemployment rate and the continued decline in job vacancies which had been elevated for some time. The language that ends the official announcement suggests that these numbers are being just as closely monitored as inflation rates. In fact, the MPC specifically mentions that it is closely monitoring signs of inflationary pressures such as “the tightness of labour market conditions and the behaviour of wage growth and services price inflation.” Thus, we should look there as well for guidance on the BoE future decisions.

The final paragraph is a quick note on the reduction of asset purchases. The MPC notes that this action was already and agreed upon discussion point in September, and that the decision to implement some form of quantitative tightening should be a surprise to no one. The size of the reduction looks to have been guided by the market as the minutes mention that “the median market expectation for the MPC’s pace of gilt stock reduction over the year ahead was £100 billion.”

The minutes of the MPC describe the situation best: “For most members within this group, the latest developments meant that the judgement to keep Bank Rate unchanged at this meeting rather than increase it was finely balanced.” While the pause feels decisive, it was not by any means, and because of that, it really does feel like this week’s inflation release made a huge difference in the voting today. Since the BoE has adopted this hyper-data-dependent mode, it should be no surprise that a reversal in the disinflation trend as demonstrated by future data would likely cause a reversal on the sentiment of the MPC. For now, however, the members can rest on the fact that the lagging nature of monetary policy suggests that much of that tightening has yet to make a major impact yet. The hope is that inflationary pressures will respond to these restrictive conditions and continue to trend the right direction.