Simon Ward, Chief Economist at Janus Henderson Investors, comments on the decision by the Bank of England’s Monetary Policy Committee (MPC) to raise UK interest rates.
The MPC raised Bank rate from 0.25% to 0.5% as expected but the accompanying Inflation Report and minutes suggest a divided Committee and no consensus on the next policy move. The Inflation Report forecasts are mildly hawkish, indicating that three further quarter-point hikes will eventually be required to return inflation sustainably to the BOE's 2% target. However, the 7-2 split vote and a new sentence in the minutes hinting at renewed policy easing if Brexit negotiations go badly have encouraged a dovish market reaction. The view here is that there is modest upside risk to the Inflation Report’s near-term growth and inflation forecasts and a follow-up rate increase is possible next spring, assuming agreement on a Brexit transition.
Dovish – when monetary policy is dovish, it means that policymakers favour more accommodating policy, because they want to stimulate growth in the economy. One of the key ways to accomplish this is keeping interest rates low.
Hawkish – when monetary policy is hawkish, it means that policymakers (in this instance inflation hawks) are concerned about inflation so favour interest rate rises to control inflation.