Monetary Policy Committee meeting, Bank of England 5/5/2022

Monetary Policy Committee meeting, Bank of England, 5^th May 2022

Fourth increase in the Bank Rate     

On 5^th May, the Monetary Policy Committee of the Bank of England voted by 6 to 3 to raise the Bank Rate by a further 0.25% to 1%. This was the fourth consecutive announcement of a rate rise following an MPC meeting. Significantly, the three dissenters voted for a full 0.5% increase. Interest rates are now at their highest level since February 2009 and the statement issued after the meeting suggests that further rises may ensue, with a projected Bank Rate of 2½% by mid-2023. The rise in consumer price inflation, which stood at 7% in the year to March, was higher than anticipated. The MPC expects it to climb further, peaking at around 10% in the final quarter of the year.

Thus far, the increases in the Bank Rate have not resulted in a significant slowdown in broad money growth, but the BoE reaffirmed that now it has reached 1%, it will actively consider selling its stock of Government bonds as well as “running off” any securities which expire, rather than re-investing the money. March saw a surprising uptick in M4x growth, which rose by over £23b., resulting in the annualised three-monthly growth rate rising form 2.3% in February to 5.7%. This has been driven largely by activity in the financial sector although businesses and households are continuing to take out substantial numbers of new loans, including new mortgages. It nevertheless remains highly likely that broad money growth will resume its downward trend in the coming months. 

Unlike the US Federal Reserve and the European Central Bank, the Bank of England has not attempted to relax its official 2% inflation target, but there is a real danger that monetary policy might be tightened too quickly in order to snuff out inflation expectations, which in turn could provoke a recession in 2023-4