February Bank of England Review: Financial Policy Attitude Turning to “Neutral”
2024-02-05
■ The Bank of England has kept its policy interest rate at 5.25%, but its financial policy attitude has been coordinated with European and American central banks.
■ The statement clearly stated the shift in attitude towards financial policy and proposed new interest rate cuts in the vote of policy commissioners.
The Bank of England (BOE) decided to keep the policy rate at 5.25% at the Financial Policy Committee (MPC) meeting on February 1st. However, the overall evaluation suggests that compared to the financial tightening direction demonstrated by the MPC in December last year, the central bank has shifted from a neutral direction. As a result, this is in line with the pace of the European Central Bank (ECB) and Federal Reserve Bank (FRB) which shifted their attitude towards financial policy in January.
BOE believes that there are two reasons for the central bank to shift its policy attitude towards neutrality. Firstly, the statement removed the phrase "if inflationary pressure continues, further tightening is necessary" and stated that consideration will continue to be given to the duration of maintaining interest rates at the current level. This indicates that the previously cautious slowdown in service prices and wage growth has exceeded expectations, and discussions within BOE tend to believe that the necessity of additional interest rate hikes has decreased. The second point is that in the vote of policy committee members, Commissioner Dhingra, who has always been considered the most negative towards interest rate hikes, proposed for the first time a rate cut. Before this, there were 3 votes for proposing a rate hike, 6 votes for maintaining the status quo, and no members proposing a rate cut. Although there are still 2 votes among the committee members who proposed to raise interest rates this time (Haskel and Mann), discussions on the direction of interest rate cuts have been added among policy members, and future choices have been made clear.
In this situation, we currently believe that interest rate cuts will be initiated from July to September this year. The main reason is BOE's outlook on inflation. In the released financial policy report for this quarter, the price target (2.0% year-on-year) was raised to the full period of 2026. When announced in November last year, the expected deceleration for the October-December period of 2025 was 2.0%, and for the October-December period of 2026 was 1.5%. BOE attributed the reason behind this increase to the financial market's expectation of policy interest rates dropping by about 1% since November last year. If this expectation is realized, inflationary pressure will continue to exist. However, BOE also pointed out that as a factor in the inflation trend, they need to observe (1) the trend of future wage increases and (2) the additional tax reduction measures of the Sunak government. Regarding (1), the latest statistics show that the wage increase rate from August to October of the year increased by 6.6% year-on-year, showing a slowing trend. On the other hand, it has been decided to increase the minimum wage for adults (aged 23 and above) by 9.8% starting from April this year, and the impact on inflationary pressures is still unknown. Regarding (2), to prepare for the general election in January next year, following the tax reduction measures in November last year, the government plans to introduce additional tax reduction measures in the spring budget of March this year. Therefore, it is necessary to evaluate these impacts.
■ The statement clearly stated the shift in attitude towards financial policy and proposed new interest rate cuts in the vote of policy commissioners.
The Bank of England (BOE) decided to keep the policy rate at 5.25% at the Financial Policy Committee (MPC) meeting on February 1st. However, the overall evaluation suggests that compared to the financial tightening direction demonstrated by the MPC in December last year, the central bank has shifted from a neutral direction. As a result, this is in line with the pace of the European Central Bank (ECB) and Federal Reserve Bank (FRB) which shifted their attitude towards financial policy in January.
BOE believes that there are two reasons for the central bank to shift its policy attitude towards neutrality. Firstly, the statement removed the phrase "if inflationary pressure continues, further tightening is necessary" and stated that consideration will continue to be given to the duration of maintaining interest rates at the current level. This indicates that the previously cautious slowdown in service prices and wage growth has exceeded expectations, and discussions within BOE tend to believe that the necessity of additional interest rate hikes has decreased. The second point is that in the vote of policy committee members, Commissioner Dhingra, who has always been considered the most negative towards interest rate hikes, proposed for the first time a rate cut. Before this, there were 3 votes for proposing a rate hike, 6 votes for maintaining the status quo, and no members proposing a rate cut. Although there are still 2 votes among the committee members who proposed to raise interest rates this time (Haskel and Mann), discussions on the direction of interest rate cuts have been added among policy members, and future choices have been made clear.
In this situation, we currently believe that interest rate cuts will be initiated from July to September this year. The main reason is BOE's outlook on inflation. In the released financial policy report for this quarter, the price target (2.0% year-on-year) was raised to the full period of 2026. When announced in November last year, the expected deceleration for the October-December period of 2025 was 2.0%, and for the October-December period of 2026 was 1.5%. BOE attributed the reason behind this increase to the financial market's expectation of policy interest rates dropping by about 1% since November last year. If this expectation is realized, inflationary pressure will continue to exist. However, BOE also pointed out that as a factor in the inflation trend, they need to observe (1) the trend of future wage increases and (2) the additional tax reduction measures of the Sunak government. Regarding (1), the latest statistics show that the wage increase rate from August to October of the year increased by 6.6% year-on-year, showing a slowing trend. On the other hand, it has been decided to increase the minimum wage for adults (aged 23 and above) by 9.8% starting from April this year, and the impact on inflationary pressures is still unknown. Regarding (2), to prepare for the general election in January next year, following the tax reduction measures in November last year, the government plans to introduce additional tax reduction measures in the spring budget of March this year. Therefore, it is necessary to evaluate these impacts.