Conflict Between Hawks and Doves: Bank of England's MPC to Maintain Interest Rates, but Anticipate Dissent Among Members
Bank of England Faces Pressure Amid Inflation Concerns and Mortgage Rates Decisions
The Bank of England is currently grappling with a challenging economic landscape, as inflation rates continue to fluctuate and policymakers weigh the pros and cons of mortgage rates adjustments.
In recent months, inflation has been a rollercoaster ride. In August 2023, inflation stood at 5.9%, but it dipped to 3.8% for two consecutive months, making the Bank's expected decision to hold mortgage rates at 4% on Thursday easier to explain. However, inflation hit a 41-year high of 11.1% in October 2022, causing concern among economists.
Economists believe that should the Bank plough ahead with dumping more of its gilts holdings, bond prices might sink amid dwindling demand, yields could spiral, and debt interest payments could destroy the headroom. This has led to pressure on the Bank to slow down its quantitative tightening (QT) process by making fewer active sales of gilts held on its balance sheet.
The Bank's focus has been on controlling price growth. In line with its remit, the Bank aims to get inflation down to 2% and this applies at all times. However, some analysts believe the 'headwinds' to the UK economy may be distracting some Bank rate-setters from the central focus on inflation.
Chief economist Huw Pill has lamented the rash decision to cut mortgage rates last year, and deputy governor Clare Lombardelli has been more vocal about the risks of 'second round' effects taking shape as a result of high wage growth in the last year. Dove-in-chief Alan Taylor, on the other hand, has expressed faith in disinflation and suggested that tariff concerns have been undercooked in forecasts.
The Federal Reserve's expected 25 basis point cut on Wednesday is likely to keep more unpredictable policymakers such as the external member Catherine Mann on edge. Markets believe the Bank will hold mortgage rates in two months, while some forecasters have held firm on the belief it could still make a 25 basis point cut.
In November 2023, two members of the Bank of England's Monetary Policy Committee argued for a 25 basis points cut in the mortgage rate, while the majority opposed it, showing a specific disagreement over the necessity of yield (rate) cuts.
Meanwhile, the Bank of England's climate change risk team was cut, signalling a more narrow focus on price stability. Governor Andrew Bailey has come under fire over his use of AI to write speeches. External member Megan Greene has said Britons' sensitivity to price hikes means firms are likely to ratchet up prices in response to higher costs.
ING economist James Smith believes the Bank's November decision 'hangs in the balance' given services inflation has been lower than expected. The exact names of the dissenting members in the November 2023 meeting were not specified in the provided data.
As the Bank navigates these challenges, it remains to be seen how it will balance the need for inflation control with the potential risks of a recession. For as long as inflation surprises forecasters and stays above the Bank's target, the argument for cutting mortgage rates becomes less convincing.
