BoE – Stagflation case materialising

In Short

The MPC continues to see the main culprit for the high inflationary pressures in the near doubling of wholesale gas prices since May due to Russia’s restriction of gas supply. For a majority of households, this will be strongly felt through another update of the Ofgem price cap.
Market Commentary

Highlights:

  • Yesterday, the BoE’s Monetary Policy Committee (MPC) raised its Bank Rate by 50 bps to 1.75%. The decision was taken by a majority of 8 - 1; one member preferred an increase by only 25 bps.
  • The bank expects CPI inflation to rise by about 3 pp higher than in the May forecast, i.e., to 13% in Q4 2022. It also sees GDP growth to turn negative in Q2 but to recover somewhat in Q3 . While most of the inflation pressures are due to energy prices, it also considers second round domestic price pressures as increasing.
  • In its central longer term scenario, the MPC expects two years of negative growth with 1.5% in 2023 and 0.25% in 2024. Inflation will still strongly exceed the 2% target by the end of 2023 but returns below target by end 2024.
  • Governor Baily stressed that the MPC is not on a predefined key rate path. Against the backdrop of the recession outlook, we still expect the BoE to finish its cycle slightly above the neutral range at 2.25%. However, upside risks have increased not least due to the announcement of Liz Truss to spent about GBP 30 bn to fight the “cost of living crisis” in (the likely) case she becomes next Prime Minister Minister.
     

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BoE – Stagflation case materialising
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