BoE vote split more hawkish than expected in the face of uncertainty

As expected, the BoE maintained its Ba nk R ate at 4.5% with a more hawkish vot ing split than expected (consensus 7 to 2) . Eight MPC policy members voted for no change and one MPC member Swati Dhingra preferred to reduce Bank Rate by 0.25pp to 4.25%. BoE continued to view “a gradual and careful approach to removing policy restraint ” as appropriate . The Committee stressed that since the last MPC meeting, global trade policy uncertainty and other geopolitical uncertainties have intensified. Given stronger than projected GDP in Q4 and January Bank staff has revised its Q1 GDP growth higher to 0.25% QoQ from +0.1% in February. Y et surveys continue to indicate weak growt h ahead . S till relatively restrictive stance of monetary policy continue to weig h on growth, while employment costs and global uncertainties have started to undermine firms’ investment decisions . The data on pay settlements and expectations were consistent with the BoE’s projection for pay growth to moderate this year Still t he pick-up in CPI inflation to 3.0% in January was higher than expected given upside news on core goods and food prices , which were possibly driven by labour costs. As such, the BoE has slightly revised its inflation forecast higher expecting CPI inflation to peak at 3.75% in Q3 this year (versus 3.7% in February) The MPC Committee saw two-sided risks around supply-demand balance and will pay close attention to any signs of more lasting inflation pressure . Yet, the MPC stressed that t here was no presumption of monetary policy being on a “pre-set” path. This suggests that the MPC will maintain a meeting-by-meeting approach when deciding on the appropriate degree of monetary policy restrictiveness. While the MPC continued to think that interest rates were on a slowly declining path , the Committee stressed that UK’s m onetary policy w ould “ need to remain restrictive for sufficiently long” until risks to inflation slowing sustainably back to 2% dissipated further. A “ gradual and careful ” approach and a more hawkish voting split suggest that the BoE will move only very gradually this year. The markets expect only a maximum of two 25bp cuts this year. Still, w e maintain our call of three more rate reductions as we believe that more sluggish hiring and activity prospects will undermine growth and pay settlements i n the period ahead.