Bank of England and European Central Bank
December 15, 2022
The Bank of England‘s Monetary Policy Committee’s 50-basis point rate hike to 3.5% matched expectations but did so in an unusual way. In a 6-3 vote, there was on dissent from Mann that preferred to raise the policy rate by 75 basis points as the committee had done in November but also two dissents from Tenreyro amd Djomgra that voted against any increase. The baseline forecast believes that inflation peaked at 11.1% in October and that recession has already begun. Wage pressure is elevated, and inflation risks are skewed to the upside. Rate normalization from a pandemic low of 0.1% began in December 2021.
The European Central Bank statement explaining today’s 50-basis point rate hike reads hawkishly. A lot more increases lie ahead, although the assertion is made that any recession is likely to be relatively short and shallow. At 2.5%, the refinancing rate remains well below inflation, and projected inflation for 2023 has been revised upward to average 6.3% (4.2% core) from 5.5% in last September’s previous forecast update. Projected inflation in 2023 is just 0.5%, less than thought earlier because of likely contractions this quarter and next. Economic growth stays below 2% in 2023 and 2024. Balance sheet reduction will commence in March 2023. “the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.” Consumer prices in November were 10% above a year earlier. the target is 2.0%, and projected inflation even in 2025 averages over that threshold at 2.3%.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of England, ECB
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