ECONOMICS : Bank of England: An “active hold” shifts our view

Research evidence excerpt

ECONOMICS : Bank of England: An “active hold” shifts our view

Another key consideration for the path ahead is financial conditions. Many officials have

stressed over recent months that it is the tightening in financial conditions that has bought

the committee some time. However, there appears to be some disagreement around

whether this can last in the absence of monetary policy tightening. This was reflected in

the minutes through the following comment:

"Some members noted that a modest rise in Bank Rate [our emphasis] would help to

ensure that financial conditions remained consistent with the intended degree of

monetary restraint and reduce the risk of later, larger tightening"

At face value this suggests there is scope for at least one insurance hike to ensure that

financial conditions do not loosen materially.

Summer holiday? On the back of the data calendar (Figure 1) between meetings, we

think it is unlikely the MPC will have enough clarity on the magnitude of second-round

effects to act during the summer. Between the July and September meetings, the

committee will receive two additional inflation prints - including those that reflect the

impact of the 13% increase in the Ofgem price cap - and two labour market prints.

Moreover, the 60-day negotiation window for a final agreement between the US and Iran

will have expired by the time of the September meeting, offering the MPC more visibility

on the severity and duration of the conflict. For a central bank that has shown a

preference to wait for clarity, September may be the earliest it can act.

The September timing was reinforced by Sir Dave Ramsden's individual guidance

paragraph. He specifically pointed to "after the summer" as the period when either

scenario A or B would materialise.