The BOE set the market up but does not deliver
For all the hawkish talk over the past two months, the BOE sure knows how to find a segue into avoiding rate hikes today. It's pretty much a case of the "bad boyfriend" as policymakers charmed the market with hope and then failed to show up when it matters.
The worst part? There's still so much ambiguity when it comes to the messaging.
At its recent meetings, the Committee has judged that some modest tightening of monetary policy over the forecast period was likely to be necessary to meet the 2% inflation target sustainably in the medium term.
This was a passage that the BOE introduced back in August and is one that they're not really acting on too convincingly (today's bank rate vote was 7-2). Adding to that, they're now putting this line in on rate hikes:
The Committee judges that, provided the incoming data, particularly on the labour market, are broadly in line with the central projections in the November Monetary Policy Report, it will be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.
What exactly constitutes to "over the coming months"? December? February next year?
There' just no backbone whatsoever after you consider all the hawkish mentions - even by Bailey himself over the past few weeks.
That's particularly upsetting especially for UK bond traders, who are probably wishing now that Carney would've stayed in charge (I know right).
In defending their inaction and in an attempt to push back against the market, the BOE made mention that:
In observing the market-implied path for Bank Rate, the Committee notes that, in the November Monetary Policy Report central projections, CPI inflation is projected to be below the 2% target at the end of the forecast period, and would probably fall a little further beyond that point, given the margin of spare capacity that is expected to emerge.
I'm not too sure what exactly is their point here in trying to keep the long-term central projection for inflation below 2% so as to justify not hiking rates but then talking up tightening policy ever since the August meeting.
I mean, don't get me wrong. Perhaps not hiking rates at this meeting was the right move as there is still considerable uncertainty regarding the pandemic and the inflation debate - especially with surging energy prices and winter coming.
Such circumstances and considerations are not the best to work with when tightening monetary policy but they may have to do something in order to get a grip on inflation eventually. The big mistake though, is foreshadowing rate hikes and talking up a hawkish game in the run up to this meeting when they aren't firm enough to act on that.
Trust is delicate. And the BOE definitely didn't score any points on that front today.
