The bank’s new inflation estimates suggests need for ‘tighter policy’, with a base rate of 5.25% within forecasts.
John Wyn-Evans, Head of Market Analysis at Rathbones, one of the UK’s leading wealth and asset management groups, said:
“We were not surprised to see the Bank of England leave the base rate unchanged at 3.75%. With so much uncertainty surrounding the future effects of supply disruption from the Middle East meeting an economy with weak momentum, it was the pragmatic decision. But we also thought that there would be a lot more information in the accompanying statement and in the views of individual members and this was indeed the case.
“In terms of the vote, it was carried 8-1 in favour of no change. The sole dissenter was economist Hugh Pill who voted for a pre-emptive quarter-point increase. However, four more members indicated that they would be inclined to follow him in the event of there being no immediate resolution to the commodity supply squeeze caused by the closure of the Strait of Hormuz.
“The Bank also published new inflation estimates in the form of scenarios rather than a central point. All of these suggested a need for tighter policy. The worst-case scenario envisages the oil price remaining around $130 per barrel with inflation rising to 6.2%. This would entail a base rate increase in the range of 66 to 151 basis points (practically between two and six quarter-point increases, or a range between 4.25% and 5.25%). The central scenario sees inflation rising to 3.7% this year.
“Market reaction was muted but relatively positive for choice. There was a sufficient display of inflation-fighting intent to balance the overall no-change vote. Gilt yields fell a little and the pound held on to its gains from earlier in the session. The news was something of a non-event for equity markets. Futures markets are discounting a quarter-point base rate hike in July with another to follow in September.
“We continue to emphasise that the current situation differs from 2022 in that the supply-side constraints are not compounded by excess demand and tight labour markets. Central banks globally are already more restrictive in terms of policy settings than they were when Russia invaded Ukraine and so ‘catch-up’ rate increases are not required as they were then.”
