BOE Hits the Pause Button Until February

UK inflation jumped by more than expected to 2.3% in October — back above the Bank of England's 2% target — from 1.7% the month prior, but that won't have changed the Monetary Policy Committee's mind much. After testimony on Tuesday to the Parliamentary Treasury Select Committee from four MPC members, including Governor Andrew Bailey, caution is uppermost. It's pretty clear that rates are on hold at 4.75% until at least its Feb. 6 meeting.

Yields on 10-year gilts rose to 4.5%, reflecting the five basis point rise across the yield curve. The pound lost initial gains to the dollar. It's possible to be both predominately dovish but also happy to wait and see — and that's where Bailey is now — though a “gradual” approach espoused by several members, which roughly translates to one 25 basis-point reduction per quarter, is less hawkish than the prevailing market view of only two further rates cuts priced in over the next year, with a slim chance of a third.

Bailey’s rhetoric no longer leans toward moving “more aggressively” to lower borrowing costs, as he said in early October in the wake of the Federal Reserve's surprise 50 basis-point easing on Sept. 17. The BOE governor has seen the fallout of rising bond yields from that and is happier playing it slowly. One thing the BOE has done better than the Fed is to successfully deemphasize the impact of data surprises. It’s learned its lesson from spring last year when the MPC panicked itself into a 50 basis-point hike. Its major internal review on its failings to prevent runaway post-pandemic inflation, conducted by former Fed chair Ben Bernanke, seems to have freed up the MPC from overly focusing on the central prediction and spend more time on emerging risks and alternative outcomes.

Testimony by the newest MPC member, Alan Taylor, was both refreshingly direct but also leaned toward inflation and growth risks being more to the downside, opening up the potential for a faster pace of rate cuts. Bailey said that this approach had been his view but he’d turned more neutral. Clearly there is some wood to chop for the policymaking committee before it can collectively move again to lower borrowing costs. That date is probably still Feb. 6, at its next quarterly Monetary Policy Review, but nothing is guaranteed.

The BOE will have one eye on the European Central Bank, where policymakers are making dovish noises. The ECB will almost certainly cut its official deposit rate again on Dec. 12 to 3%, with five further cuts priced in to take rates below 2% in the euro area next year.