Resurgent Price Pressures Put BOE Hawks Back in the Ascendancy

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(Bloomberg) — A month is a long time in central banking. The Bank of England is this week expected to deliver its most hawkish decision since September as policymakers start to fret about building price pressures.

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The vote this Thursday comes just weeks after the Monetary Policy Committee cut rates by a quarter-point and doves gained an unlikely ally as former-hawk Catherine Mann backed a bumper half-point reduction. Traders reacted by fully pricing in another cut in May. They have now trimmed those odds to 70% and expect only two more reductions this year.

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Two rate-setters who backed cuts at the previous three meetings — BOE Deputy Governor Dave Ramsden and external appointee Alan Taylor — appeared to be wavering in recent appearances. Meanwhile, despite making the case for slashing rates last month, even Mann has emphasized the need to keep policy restrictive. 

Economists surveyed by Bloomberg on balance expect seven MPC members to vote for no change, with two backing a quarter-point reduction. That would put support for cutting rates at the lowest since September, when only Swati Dhingra pushed for cheaper borrowing costs. Guidance for a “gradual and careful” easing of policy is likely to remain in place.

“Recent comments from doves Taylor and Ramsden suggest that they have likely turned less dovish, no longer see inflation risks as only tilted to the downside and are likely on board with the gradual path,” said Sonali Punhani, UK economist at Bank of America. “Despite Mann’s flip to a 50 basis-point cut in February, the overall balance of the committee has become less dovish.”

Officials will weigh warnings on inflation against a lackluster British economy that contracted in January and mounting geopolitical tensions as US President Donald Trump escalates a tariff war with major trading partners.  

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Inflation is being driven by what BOE Governor Andrew Bailey calls “temporary factors,” mainly energy and food. But with the BOE expecting price growth to peak at 3.7% this year, he and other officials are not ruling out second-round effects on wages and prices. The risks were underlined by data last week showing a sharp pickup in Britons’ inflation expectations. 

“Thanks to a combination of rising inflation and increased geopolitical uncertainty, most policymakers appear happy to stick to lowering rates at a quarterly pace,” said Dan Hanson and Ana Andrade, economists at Bloomberg Economics.

Recent comments from some in the dovish camp point to a shift since early last month when the MPC lowered the key rate for a third time since August. 

Ramsden — who is seen as a bellwether voter on the MPC — dropped his dovish bias and moved back toward the center ground in a speech in South Africa. He said he is “less certain” about the outlook for the jobs market and has been influenced by BOE agents predicting more hefty increases in wages.

Taylor has also become more cautious, telling lawmakers earlier this month that his certainty over the inflation outlook “has gone down significantly.” His testimony suggested he saw the risks ahead as more two-sided. 

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In New Zealand, Mann said her vote for a half-point cut was meant to send a signal to financial markets distracted by events in the US, but warned that data on wages and prices “are not yet target-consistent.”

“The cut-hold tempo has become well established and renewed concerns about supply weakness mean it’s very unlikely there will be more than two or three votes for back-to-back cuts,” said Andrew Goodwin, chief UK economist at Oxford Economics. “The only real question mark is whether Taylor votes to cut.”

Bank of England May Need to Pause Rate Cuts, Ex-Officials Warn

One factor being watched closely by the central bank is the fallout from a £26 billion ($33.6 billion) increase in employer payroll taxes set to take effect in April.

A survey of 1,520 executives by Boston Consulting Group found that only 15% of businesses are planning to lay off workers in response to the tax increase. Many are reluctant to let staff go for fear of not being able to replace them if demand picks up. 

Instead, they are cutting non-essential costs in areas like real estate or supply chain management or limiting hiring.

“Across the board businesses are still more likely to grow rather than reduce headcount, suggesting there is still sufficient demand in the economy,” said Raoul Ruparel, director at BCG’s Centre for Growth. “Economic growth will likely be as good as last year, with the potential to be even slightly better.”

—With assistance from Harumi Ichikura.

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