London Daily

Focus on the big picture.
Saturday, Aug 02, 2025

Analysis: Bank of England split raises policy doubt at key moment for economy

Analysis: Bank of England split raises policy doubt at key moment for economy

The surprise split vote behind the Bank of England's interest rate hike last week, which was too small for almost half its officials, threatens to obscure the British central bank's intentions and potentially hurt the economy.

Some BoE watchers say emerging evidence of division among policymakers over how to respond to inflation could sow confusion about its reaction function - the way investors and the public can expect a central bank to respond to economic developments.

The BoE has already been accused of mixed messaging after wrong-footing investors who expected a rate hike in November, then raising borrowing costs in December.

"The on-and-off-again November interest rate hike was only a microcosm of that," said economists Robert Wood and Kamal Sharma from BofA Global Research.

"What we see as changes to reaction function leave us more concerned about the current inflation episode."

With the BoE warning that inflation could soon surpass 7% - almost four times its target - four of the nine Monetary Policy Committee (MPC) members voted on Feb. 2 to raise Bank Rate to 0.75%.

That would have represented the biggest one-off increase in borrowing costs since the BoE became operationally independent 25 years ago.

In the end, a slim majority of five, including Governor Andrew Bailey, voted for a 0.25 percentage point increase to 0.5% - still historically very low.

While the MPC agreed that further modest tightening of monetary policy was likely in the coming months, the difference between the two camps was about more than a few basis points.

Minutes from their meeting showed they had different approaches to bringing inflation back towards the BoE's 2% target.

Policymakers backing a 25 basis point increase worried that a bigger rise might provoke an "outsized" shift in Bank Rate expectations among investors, which already looked steep enough to push inflation well below target in three years' time.

From this group, Chief Economist Huw Pill said on Friday he was keen to avoid the impression the BoE was going "foot to the floor" in a rapid and steep cycle of policy tightening that risked hurting the economy unnecessarily.

The minority of four MPC members who wanted a bigger rate hike thought the BoE should aim to jolt expectations about higher inflation and cut out the risk that price pressures get embedded in pay deals and expectations for future inflation.

The BoE could probably squash inflation by raising Bank Rate a couple more times to 1% in May and running down its nearly 900 billion pound ($1.2 trillion) bond-buying programme, alongside "consistent, forceful communication", Wood and Sharma said.

But they warned that any lack of a clear message risked creating an economic downturn that could possibly have been avoided.

While the U.S. Federal Reserve looks set to raise rates in March, there seems less chance of similar differences emerging among its officials about how to tighten policy.

Even St. Louis Fed President James Bullard, a strident supporter of early and fast policy tightening, told Reuters last week it was not clear what starting off with a bigger, 50 basis point, hike would accomplish.

NO CLEAR MESSAGE?


While the BoE has sometimes faced accusations of groupthink during normal times, in past periods of economic upheaval its policymakers mostly stuck to the same script, helping businesses and households to plan ahead, Wood and Sharma noted.

Its current approach differs from the forward guidance policy of former governor Mark Carney, who tried to issue clear statements about the reaction function - although he too faced criticism that this made the BoE a hostage to fortune.

Most BoE officials did not speak publicly before last week's rates announcement and after the communication missteps of last year Bailey said he could imagine going back to the days of no guidance.

But some economists warn that without a consistent message at a critical juncture for expectations about the economic and policy outlook, the BoE risks losing control of the narrative, with real world consequences.

The market reaction to Thursday's decision may have been a taster of that scenario.

Investors ratcheted up their bets for future interest rate hikes, despite the signal from the BoE's inflation forecasts that it thought the market view of the rates outlook was already aggressive.

If the market goes too far in pricing rate hikes, and for too long, it would tighten financial conditions and hurt the ability of businesses and households to access finance.

"We think markets are currently pricing in too many hikes; something that could persist until the BoE clarifies its approach," said Vivek Paul, UK chief investment strategist at the BlackRock Investment Institute.

"The MPC will need to communicate clearly what its motivation is, in our view, to avoid over-tightening financial conditions and hurting the real economy."

($1 = 0.7394 pounds)

Newsletter

Related Articles

0:00
0:00
Close
Germany Enters Fiscal Crisis as Cabinet Approves €174 Billion in New Debt
Trump Administration Finalizes Broad Tariff Increases on Global Trade Partners
J.K. Rowling Limits Public Engagements Citing Safety Fears
JD.com Launches €2.2 Billion Bid for German Electronics Retailer Ceconomy
Azerbaijan Proceeds with Plan to Legalise Casinos on Artificial Islands
Former Judge Charged After Drunk Driving Crash Kills Comedian in Brazil
Jeff Bezos hasn’t paid a dollar in taxes for decades. He makes billions and pays $0 in taxes, LEGALLY
China Increases Use of Exit Bans Amid Rising U.S. Tensions
IMF Upgrades Global Growth Forecast as Weaker Dollar Supports Outlook
Procter & Gamble to Raise U.S. Prices to Offset One‑Billion‑Dollar Tariff Cost
House Republicans Move to Defund OECD Over Global Tax Dispute
Botswana Seeks Controlling Stake in De Beers as Anglo American Prepares Exit
Trump Administration Proposes Repeal of Obama‑Era Endangerment Finding, Dismantling Regulatory Basis for CO₂ Emissions Limits
France Opens Criminal Investigation into X Over Algorithm Manipulation Allegations
A family has been arrested in the UK for displaying the British flag
Mel Gibson refuses to work with Robert De Niro, saying, "Keep that woke clown away from me."
Trump Steamrolls EU in Landmark Trade Win: US–EU Trade Deal Imposes 15% Tariff on European Imports
ChatGPT CEO Sam Altman says people share personal info with ChatGPT but don’t know chats can be used as court evidence in legal cases.
The British propaganda channel BBC News lies again.
Deputy attorney general's second day of meeting with Ghislaine Maxwell has concluded
Controversial March in Switzerland Features Men Dressed in Nazi Uniforms
Politics is a good business: Barack Obama’s Reported Net Worth Growth, 1990–2025
Thai Civilian Death Toll Rises to 12 in Cambodian Cross-Border Attacks
TSUNAMI: Trump Just Crossed the Rubicon—And There’s No Turning Back
Over 120 Criminal Cases Dismissed in Boston Amid Public Defender Shortage
UN's Top Court Declares Environmental Protection a Legal Obligation Under International Law
"Crazy Thing": OpenAI's Sam Altman Warns Of AI Voice Fraud Crisis In Banking
The Podcaster Who Accidentally Revealed He Earns Over $10 Million a Year
Trump Announces $550 Billion Japanese Investment and New Trade Agreements with Indonesia and the Philippines
US Treasury Secretary Calls for Institutional Review of Federal Reserve Amid AI‑Driven Growth Expectations
UK Government Considers Dropping Demand for Apple Encryption Backdoor
Severe Flooding in South Korea Claims Lives Amid Ongoing Rescue Operations
Japanese Man Discovers Family Connection Through DNA Testing After Decades of Separation
Russia Signals Openness to Ukraine Peace Talks Amid Escalating Drone Warfare
Switzerland Implements Ban on Mammography Screening
Japanese Prime Minister Vows to Stay After Coalition Loses Upper House Majority
Pogacar Extends Dominance with Stage Fifteen Triumph at Tour de France
CEO Resigns Amid Controversy Over Relationship with HR Executive
Man Dies After Being Pulled Into MRI Machine Due to Metal Chain in New York Clinic
NVIDIA Achieves $4 Trillion Valuation Amid AI Demand
US Revokes Visas of Brazilian Corrupted Judges Amid Fake Bolsonaro Investigation
U.S. Congress Approves Rescissions Act Cutting Federal Funding for NPR and PBS
North Korea Restricts Foreign Tourist Access to New Seaside Resort
Brazil's Supreme Court Imposes Radical Restrictions on Former President Bolsonaro
Centrist Criticism of von der Leyen Resurfaces as she Survives EU Confidence Vote
Judge Criticizes DOJ Over Secrecy in Dropping Charges Against Gang Leader
Apple Closes $16.5 Billion Tax Dispute With Ireland
Von der Leyen Faces Setback Over €2 Trillion EU Budget Proposal
UK and Germany Collaborate on Global Military Equipment Sales
Trump Plans Over 10% Tariffs on African and Caribbean Nations
×