BoE – searching for consistency

The BoE raised rates by 0.5% today but remains the standout dove of the global central banking community. Their line is that the recession they forecast is going to do all the work, and more, on inflation.

Today’s statement says: “inflation was expected to fall sharply from mid 2023, to some way below the 2% target in years two and three of the projection”. So, the BoE feels that if it tightens as much as markets currently expect, inflation will end up below target. But it carries on: “the risks around that declining path for inflation were judged to be to the upside”.

So, the BoE is very clear that its different approach to bringing inflation down – i.e. the recession will do the job – runs the risk of leaving inflation higher. The approach of the Fed and now the ECB – namely, to take rates to restrictive levels and maintain them there whilst also letting the economic downturn takes its effect – seems to be more focussed on indicating a clear and hawkish intent to break the back of inflation.

But there’s another line towards the end of the summary, which seems contradictory to the above assertion that inflation will be below 2% two to three years out: “should the economy evolve broadly in line with the November MPC projections, further increases in Bank Rate may be required for a sustainable return of inflation to target”. So on the one hand, if we tighten policy in line with market expectations, inflation will be below target in two and three years’ time. But if the economy unfolds as we expect, we will need to tighten rates further to bring inflation back to target. I’m personally not sure how to take that, other than perhaps to say that inflation uncertainty is really high!

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