(Bloomberg) -- For most of the UK’s inflation shock over the past two years, Bank of England policy reacted to swings in wage and prices data. Now it’s leaning much more prominently on its own forecasts.
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In a firm signal that noisy numbers won’t knock policymakers off their interest-rate-cutting path, they responded on Thursday to two large, surprise overshoots in pay and inflation outcomes earlier in the week with a “dovish hold” at 4.75%, as Capital Economics Deputy Chief UK Economist Ruth Gregory put it.
“We think a gradual approach to future interest-rate cuts remains right,” BOE Governor Andrew Bailey said.
Three members of Monetary Policy Committee voted for an immediate quarter-point move, five believed “recent developments added to the argument for gradual approach” to easing, and one – thought to be Catherine Mann – is poised to favor doing so aggressively in due course.
The panel squarely rejected traders’ analysis that inflation in the coming months will prove too persistent to allow further reductions in borrowing costs. Financial markets were certain of just one full rate cut next year in the immediate aftermath of the data, down from three a week earlier.
Instead, policymakers are now putting more weight on their view of the future, dismissing the surprise increase in private sector pay to 5.4% from 4.9% as a “volatile” indicator. Markets came back halfway after the vote, with two quarter-point reductions now fully expected in 2025.
For officials, sluggish growth since Labour’s tax-raising budget, and signs in their survey of businesses across the UK that the labor market is weakening, overrode the immediate data out-turns — a stance all the more striking in light of the US Federal Reserve’s refocus on price risks.
“There has been a scaling down of data dependence and more emphasis on the forecast,” said Michael Saunders, a former BOE rate-setter.
Dan Hanson, chief UK economist at Bloomberg Economics, said the MPC was “becoming less sensitive to data surprises and more forward-looking.”
Big Test
The shift formally took place in August when the BOE first cut its rate to 5% from 5.25% and dropped a specific focus on “labor market conditions, wage growth and services price inflation.” But December was the first big test after the data went the wrong way. Rather than respond cautiously, the BOE moved even more aggressively with three rate cutters. Economists had expected an 8-1 split to hold.