The highlights from the MPC statement are as follows:
- Indicators suggest that recent interest rate hikes have slowed overall demand growth and housing market activity.
- There are also signs that inflation expectations have begun to decline again, although they are still above the Bank’s inflation target.
- Demand appears to have been strong in Q3, although the outlook is for a slowdown as the winter advances.
- Furthermore, recent indicators from the labour market suggest that the output gap in the domestic economy has peaked.
- Moreover, the global economic outlook has deteriorated and uncertainty has grown, which could cause domestic demand to ease more quickly than previously assumed.
Doves, not hawks?
Although today’s modest increase is a clear sign of a turning point in the MPC’s interest rate policy, it is equally important that the forward guidance in this morning’s statement is quite different from that in August – and arguably neutral.
It reads as follows (changes in bold):
The MPC will continue to ensure that the monetary stance is tight enough to bring inflation back to target within an acceptable time frame. Near-term monetary policy decisions will depend on developments in economic activity, inflation, and inflation expectations. Decisions taken at the corporate level, in the labour market, and in public sector finances will be a major determinant of developments in interest rates in the coming term.
For the sake of comparison, the August statement read as follows:
The MPC considers it likely that the monetary stance will have to be tightened even further so as to ensure that inflation eases back to target within an acceptable time frame. Near-term monetary policy decisions will depend on developments in economic activity, inflation, and inflation expectations. Decisions taken at the corporate level, in the labour market, and in public sector finances will be a major determinant of how high interest rates must rise.
Today’s statement is considerably milder in tone than its recent predecessors.
Present monetary tightening possibly sufficient
At the press conference following the announcement of the decision, it was noted that the CBI’s inflation forecast from August was probably too pessimistic as regards the short term. Furthermore, various indicators implied that the CBI’s interest rate hikes and tightened borrower-based measures were getting results: twelve-month inflation had begun to fall, and the housing market – an important component of headline inflation – had shifted gears. Developments in house prices, CBI officials said, were a key factor in lowering both inflation and inflation expectations.