— Decision was a “close call,” says governor, as four members argue for a steeper increase
LONDON (MaceNews) – The Bank of England lifted interest rates for the second straight meeting — the first consecutive hikes since 2004 —but surprised the markets with a decidedly hawkish outlook, according to minutes of the February Monetary Policy Committee meeting released on Thursday.
Base Rate rose by 25 basis points to 0.5%, a move widely anticipated by forecasters. But four of nine MPC members argued for an immediate 50 basis point jump, suggesting that rates could continue to rise in months to come, despite slowing UK growth.
The rate decision “was a close call,” Governor Andrew Bailey told reporters after the release of the minutes, denying that the arguments for a bigger rise suggested that the BoE had fallen “behind the curve.” Bailey sided with the majority, but the four dissenting votes represented the biggest opposition to his view since taking the helm of the Bank in March of 2020.
The Bank upgraded its inflation outlook, with consumer price inflation expected to “peak at around 7.25%” in April, up from the 6% high predicted in December. CPI surged to an annual rate of 5.4% in December, the fastest pace since March of 1992, and well above the BoE’s 2.0% target.
However, the British economy struggled in December, with retail sales slumping by 3.7% in the final months of the year. “UK GDP growth is expected to slow to subdued rates,” Bailey said. Output “is expected to decline by 0.5% in December,” he added, limiting fourth quarter growth to “just over 1%.”
The performance of the auto sector suggests downside risks to that December forecast. Car sales — which are not included in the official estimate of retail activity — declined by 6%, while vehicle production slid by 18%. December and fourth quarter GDP data are scheduled for release on 11 February.
The downgraded forecast may cause a bit of concern amongst government officials, a number of whom have boasted of the UK’s G-7 leading growth rate when defending Prime Minister Boris Johnson against allegations of attending parties in contravention of government-issued Covid guidance. US GDP rose by a quarterly rate of 1.7% in the closing months of 2021, while France expanded by 0.7%.
While MPC members voting for a steeper rate hike highlighted the tightness of the UK labour market, Bailey argued that employment pressures could soon peak. “Unemployment is expected to fall over the next three to four months,” he said, adding that it would be incorrect to assume that interest rates “are on a long march upward.”
The MPC unanimously agreed to halt the reinvestment of maturing assets, in line with previous guidance, with the entire programme of asset sales ending “no earlier than towards the end of 2023,” according to the minutes. The Bank will also begin reducing its stock of corporate bond purchases.