Bank of England Hawks Appear Isolated as Deputies Shift Ground

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(Bloomberg) — Clear blue water is emerging on the Bank of England’s rate-setting committee with its three hawks now looking increasingly stranded in their push for higher interest rates. 

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At face value, Thursday’s 6-3 vote split suggested growing support for immediate action to offset the Iran energy shock as Catherine Mann joined the dissenters. But it belied a dovish shift on the rest of the panel led by telling interventions from deputy governors Clare Lombardelli and Dave Ramsden.

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The pair had struck a more hawkish tone at the three previous meetings since the war broke out, concerned that the swings in oil and gas prices would trigger the second-round effects that kept UK inflation high after the 2022 energy shock. With economic growth sluggish and companies reluctant to hire, those worries appear to be fast dissipating.

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“While Mann joining the dissenters might have been the most eye-catching shift, I think the more important one was the change in tone of the two deputy governors,” said Jack Meaning, chief UK economist at Barclays. There is now a “solid majority” saying that, unless upside risks domestically and abroad crystallize, they will hold.

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Ramsden — who is seen as a bellwether on the committee — talked up the prospect of resuming the rate cuts that were paused by the conflict should a resolution be found soon and domestic price pressures continue to ease. “An early assessment of second-round effects suggests they are more likely than not to be limited,” he said.

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Lombardelli, who often sided with the hawks trying to block rate cuts before the war, also appears to be persuaded by bank analysis suggesting little sign so far of inflationary pressures spreading. She said in the post-decision press conference that it “wasn’t a close judgment” for her to back a hold, saying she has “learnt quite a lot about the security of that disinflation process prior to the war.”

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“Lombardelli’s comments were particularly notable as she has tended to lean slightly hawkish relative to the center of the committee, and there was some expectation she could take a firmer stance,” said Modupe Adegbembo, economist at Jefferies. “The hawks appear increasingly isolated.”

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BOE Chief Economist Huw Pill, who backed a hike, also noted the shift, saying on Friday that Lombardelli “put a bit of a firebreak in thoughts that the MPC might be shifting toward a rate increase in the next meeting.”

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Before the war, four officials were often in the hawkish camp and another four in the dovish one, with Governor Andrew Bailey being the swing voter. Battle lines are hardening again but a hike now looks far off with Bailey and Lombardelli siding with the doves for now.

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James Smith, developed market economist at ING, said there is “some clear water” between the doves and hawks. 

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“That sets the bar to hike relatively high – though not insurmountably so. I continue to think 4% inflation is an important line in the sand,” he added.

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Inflation was 2.6% last month, and only under the BOE’s “adverse” scenario, under which energy costs surge, would it climb above 4%, according to modelling published by the bank. The central projection is for price growth to peak at 3.2% in the fourth quarter of this year.