BoE: the dove has landed

What is the opposite sound of “boom”?

The Bank of England raised interest rates by 50 basis points, bringing the bank rate to a 14-year high of 2.25%. For the FT:

The move takes the BOE’s benchmark rate to its highest level since the global financial crisis began in 2008. However, the nine-member Monetary Policy Committee has pulled back from the even more aggressive approach taken by colleagues at the European Central Bank and the US Federal Reserve, which this week implemented a third consecutive hike of 0.75 percentage points.

The jump matches economists’ expectations (as interviewed by Bloomberg), but the markets were expecting more. Sterling had a slight faint in response:

© Bloomberg

The monetary policy committee now looks remarkably divided:

  • Andrew Bailey (governor), Huw Pill (chief economist), Ben Broadbent and Sir Jon Cunliffe (deputy governors) and Silvana Tenreyro (external) vote for 50 basis points

  • Jonathan Haskel, Catherine Mann (external members) and Sir Dave Ramsden (deputy governor) voted 75bp

  • Swati Dhingra (external) member, voted for 25 basis points

A three-way split, with a rating of 25bps!

Some of the immediate reactions are. . . less than positive:

Perhaps we shouldn’t be surprised: For a panel that ideally represents a coherent and balanced view of monetary policy, the shift from hawkish Michael Saunders (who resigned last month) to Dhingra, best known for his criticism of Brexit, is particularly acute.

Today’s decision suggests that Tenreyro appears to have lost its place as Threadneedle Street’s main dove, and the MPC’s slant has changed.

Here is the summary of Dhingra’s argument, from the minutes of the MPC, which also reads that she considered taking 50 bp (emphasis ours):

One member preferred a 0.25 percentage point increase in the bank rate to 2% at this meeting. For this member, recent data results had suggested that activity was already weakening e the risks of short-term second-round effects of inflation were diminishing. On the latter, service price inflation was higher than expected it could reflect the price of energy or base effects in some sectors that would not persist, and wage growth in the service sectors had been negatively correlated with producer price inflation in recent quarters. Against this, there may be further demand-on-supply pressures in the medium term, including from fiscal policy expectations.

Squad transience is back in play, baby! And with the pound in goblin mode, it now seems clearer than ever that the Bank will not come to its rescue.

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