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United Kingdom Monetary Policy May 2022

United Kingdom: BoE hikes rates in May, but forward guidance is dovish

On 5 May, the Bank of England (BoE) increased the bank rate from 0.75% to 1.00%, marking the fourth successive rate hike. Three of the nine members of the Bank’s committee voted to raise rates by 0.50 percentage points, compared to market expectations of only one dissenting voice. Moreover, the Bank stated that it was considering selling government bonds, and that it would provide more guidance on bond sales at its August meeting.

The Bank’s decision was driven by the desire to rein in surging inflation—which is already well above the 2% target and is expected by the Bank to peak at slightly over 10% in Q4. Moreover, the BoE stated that the economy had performed better in Q1 than projected, and that the labor market remained strong, providing the leeway to hike.

The Bank’s forward guidance remained dovish, with the Bank stating that “most members of the Committee judge that some degree of further tightening in monetary policy may still be appropriate in the coming months” but that “there are risks on both sides of that judgement.” The Bank’s dovish stance was based on its assessment that current price pressures are largely external in origin and should eventually dissipate. The BoE was also downbeat about medium-term economic prospects, forecasting a slight GDP contraction in 2023. In line with this, our panelists still project higher rates later this year, although tightening is unlikely to be as aggressive as in many other developed markets, such as the U.S.

Nomura’s George Buckley gave his outlook for rates:

“We have retained our view of a terminal rate of 1.75% we have brought forward the point in time at which that is reached by three months. We now see 25bp rate hikes in June, August and November this year at which point we think the Bank will be stopped-out by a turn in the economic cycle and expectations of slowing inflation thereafter.”

Daniel Vernazza, chief international economist at UniCredit, was more dovish:

“The message is that less monetary policy tightening is required to return inflation to the 2% target sustainably than financial market expectations for bank rate to rise to 2.5% in a years’ time. […] We still think the MPC will probably only be able to hike once more in this cycle, by 25bp in August.”

The next policy rate decision is scheduled for 16 June.

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