Bank of England: The dovest hawk you ever did see

Receive free Bank of England updates

We’ll send you a myFT Daily Digest email rounding up the latest Bank of England news every morning.

The MPC voted 7-2 to increase interest rates by 75 bps, which is the biggest hike in decades, whatever.

Reuters:

The Bank of England raised interest rates to 3% on Thursday from 2.25%, its biggest rate rise since 1989 as it warned of a “very challenging” outlook for the economy.

The central bank forecasts inflation will hit a 40-year high of around 11% during the current quarter, but that Britain has already entered a recession that could potentially last two years — longer than during the 2008-09 financial crisis.

Grim charts abound, but the classics are classic for a reason:

🙃

Boringly, the hike size is what markets expected — but the devil, as ever, is in the detail.

First up, the two: Swati Dhingra went for 50 bps but has been dramatically undercut by Silvana Tenreyro, who isn’t letting anyone steal the dove crown, opting for just 25 bps. Here’s Tenreyro’s reasoning:

One member preferred a 0.25 percentage point increase in Bank Rate, to 2.5%, at this meeting. Monetary policy had already been restrictive in light of falling real incomes, with the economy now likely to be entering recession. Importantly, most of the tightening in policy over the past year was yet to feed through to the real economy. In line with estimated transmission lags, the prevailing level of Bank Rate would, in time, result in a looser labour market and lower domestic inflationary pressures, such that medium-term inflation was likely to fall below target. However, there remained uncertainty over the size of second-round effects from high headline inflation, and over how far and how quickly the labour market would respond to the slowing in demand. This member therefore felt that a further gradual tightening was warranted on risk management grounds, albeit that these grounds were becoming weaker as the policy stance became more restrictive.

So tl; dr version seems to be: we’ve been punching the economy in the face for a year, let’s take a second to ask if it’s sorry yet.

Dhingra’s thesis is similar:

The clearer signs of the cost of living crisis taking hold on economic activity suggested a more gradated approach was warranted to avoid an overtightening in policy. The lags in the effects of monetary policy implied that sizeable impacts from past rate increases were still to come through. The continued risks from volatility and geopolitical uncertainty necessitated some tightening. But these risks also made it harder to take stock of the current situation and a smaller rate increase was warranted to safeguard against creating a deeper and longer recession.

In a week where the talk has been pivot, pivot, pivot, oh, this is surely confirmation that the BoE’s direction of travel is assuredly dovish.

Remarkably, that has allowed the biggest interest rate hike in 33 years to look like an easing-off — the monetary equivalent of having a final tequila shot, then calling it a night.