UK Watch: BoE preview: Hold to assess

Research evidence excerpt

UK Watch: BoE preview: Hold to assess

scenarios and continued rising inflation outturns/expectations can tilt her to a hike. But

she has also pointed to tighter financial conditions. Uncertainty on duration of the

conflict as well as size/ persistence of the energy shock would likely mean that none of

the doves vote for a cut.

Somewhat hawkish risks vs. current patient approach

The message is likely to be balanced, with the door open to modest hikes and the MPC

to say that aggressive tightening is unlikely. Given the uncertainty we don’t expect an

explicit pre-commitment/guidance for a hike. We also expect it to continue to rule out

near term cuts even if energy prices fall. The BoE is likely to keep guidance unchanged

that “It stands ready to act as necessary to ensure that CPI remains on track to meet the

2% target in the medium term.

But relative to the current patient approach, we think risks are titled to a somewhat

hawkish tone as the energy shock prolongs. Recent BoE speech from Bailey/Breeden

signals less urgency. Bailey noted that tolerating inflation temporarily above 2% is

appropriate, given uncertainty and weakness in the economy, while Breeden noted we

don’t need to respond in June or July. But the BoE has also repeatedly noted that while

continued weakness in activity/labour market could mean second round effects are

modest, risks of them being stronger would rise, the larger and more persistent the rise

in energy prices is. Tolerance would reduce if second round effects begin to emerge,

which are likely to be stronger, the larger and more persistent the shock is.

With elevated energy prices for almost four months, the Committee could move towards

considering a scenario with more persistent energy prices vs. what they had in Scenario

A or B.