At first glance, the BoE decision had signs of a hawkish tilt. Last meeting dissenter Cunliffe was voting for a hike and 3 other board members were voting for a 50 bps hike. However, the detail revealed that the BoE is now expecting the UK economy to slip into negative territory in 2023. This was a dovish development that sent the GBP sliding out of the meeting.
The BoE’s problem
The problem that the BoE has, alongside many other central banks, is how to control inflation without slowing growth. Inflation is now at 7% in the UK and is expected to move higher this year. In many ways, the problem of controlling inflation without slowing growth is impossible to solve. It is like saying, ‘help me draw a square circle’. So, at the latest meeting, the BoE is signaling it needs to contain inflation as it expects it to now peak at 10% in the UK.
At the same time, it is recognising that growth will be turning negative in 2023 due to increases in global energy and tradable goods prices. This is the stagflationary environment of high inflation, but low growth. In this environment, you would typically expect the USD and gold to do well.
The Russian/Ukraine impact
The surge higher in commodity and energy prices has been compounded by the Russian/Ukraine conflict. The BoE warned that the latest rise in future energy prices means that Ofgem’s utility price caps could again be substantially higher when they are reset in October 2022. This is seen as an upside risk for inflation to push even above 10%.
Consumer confidence falls
Unsurprisingly, the BoE stated that consumer confidence has fallen. Higher taxation, rising living costs, and soaring energy bills have all meant a squeeze on real household disposable incomes. The BoE expects this to now drag on growth, so this is why the MPC recognised this, and the medium-term growth outlook has been revised down lower. The 2023 growth was revised down (and negative) from 1.25% and is now -0.25%. This is what sunk the GBP post the BoE.
This means the BoE may now need to pause the hiking cycle around the summer time and potentially cut rates in 2023. So, if you are lucky enough to be renewing your mortgage in 2023 you may want to take some degree of comfort amongst the bleaker outlook. Sonia futures strip dipped lower post the BoE as it projects a lower rate path ahead for the UK.