What was behind the decision?
The committee decided that given the weakness of q1 data, which they attribute to the poor weather seen across February and March, today was not the right time to raise rates.
Instead a majority of members decided to leave interest rates on hold until they know if last quarter’s weak growth was just a blip, or something more serious. Paragraph 41 from the accompanying minutes is as follows:
“For these members there was value in seeing how the data unfolded over the coming months, to discern whether the softness in q1 may persist, and to learn more about how the economy was evolving with the May Inflation report projections”.
This was as expected. The next line however suggest that the interest rate path will not be as steep as previously thought.
“At this meeting the costs to waiting for additional information were likely to be modest, given the need for only limited tightening over the forecast period to return inflation sustainably to target”.
This is a rather less hawkish tone compared to three months ago – when the Bank said rates would need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated. Markets now expect three rate rises over the next three years, with the first potentially not coming until the end of this year. This is opposed to the two rate hikes they were expecting back in February.
Still some confusion over Bank’s communication strategy
The change in tone in today’s release would therefore suggest that the economic outlook has changed then…right?
Well not according to the MPC, or the Governor, who had to continually bat off questions regarding the Bank’s communications policy in his press conference.
The Bank believe that the weakness in the data is a temporary soft patch, and that momentum will return to the economy in q2. The economic outlook is therefore “little changed” from February.
Yet the Bank have revised their forecasts considerably – including revisions to Eurozone growth, wages and the relative contributions of consumption and investment to UK growth. This appears a little contradictory. Furthermore if the Bank’s decisions are data driven, and the economic outlook has little changed, then why the change in tone in the inflation report?
As we said at the time, and was highlighted in the press conference, businesses are not necessarily fazed by a small rate rise, but they do want to be clearer about the Committee’s upcoming actions and monetary policy stance. The Bank should therefore try to resolve the tension of individual views within the MPC and provide forward guidance.