Bank of England Hikes and Remains Convinced that CPI will Fall Despite February's Surprise
Economic news and commentary for March 23, 2023
Bank of England Announcement
The Bank of England (BoE) increased its Bank Rate by 25 bps to 4.25% by a vote of 7-2 with 2 members electing to pause. The hike comes after a hot February CPI report showed that inflation was higher than expected at the start of 2023. The BoE even pointed out in its announcement that both food and core goods inflation have surprised to the upside versus what the BoE was expecting. This more or less solidified a 25 bps hike in this meeting and keeps them in data-dependent mode. Notably, the BoE retained the phrase “the MPC will adjust Bank Rate as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit” from the February announcement. In terms of the inflation forecast, the BoE still expects inflation to fall in 2023, and in particular, it expects CPI inflation to “fall significantly in 2023 Q2” as wage growth falls back but services inflation remains unchanged. The BoE is also banking on the recent increase in clothing prices “which tend to be volatile and could therefore prove less persistent” to decline. The recent banking crises in the US and Europe did not go unaddressed, but the BoE did not seem overly concerned as it said “the UK banking system maintains robust capital and strong liquidity positions.” While the BoE will continue monitoring the situation, there was no mention of any action being taken on behalf of the financial system.
What’s the takeaway? The Bank of England was forced to respond to the upside surprise in inflation this week, and it did so with care. While acknowledging that inflation was higher than expected, the admission was paired with an insistence that CPI was projected to fall sharply and that there was no expectation that the war against inflation was being lost. However, the BoE also did not guide toward softer policy and replicated the wording in the last meeting when another 25 bps rate hike was expected. This doesn’t necessarily mean that there will be another next meeting, but it does mean that if there is no evidence of inflation cooling by the time the BoE meets again, another quarter point could be in the discussion.
Still to come…
10:00 am (EST) - US New Home Sales
10:30 am - US EIA Natural Gas Report
11:00 am - EU Consumer Confidence Flash
11:00 am - US Kansas City Fed Manufacturing Survey
4:30 pm - US Fed Balance Sheeet
7:30 pm - Japan CPI
Morning Reading List
Other Data Releases Today
The Chicago Fed National Activity Index fell to -0.19 in February, down from 0.23 in January. The individual component contributions are as follows: the sales component was -0.02 (Jan -0.12), the employment component was -0.02 (Jan 0.10), the consumption component was -0.08 (Jan 0.10), and the production component was -0.08 (Jan 0.15).
The US current account deficit fell -5.6% to $206.8 bil in Q4 2022. The $12.2 bil narrowing of the current-account deficit primarily reflected a reduced deficit on secondary income. Also contributing was an expanded surplus on services.
Jobless claims fell -1,000 to 191,000 last week. The insured unemployment rate was unchanged at 1.2%. Continued claims grew 14,000 to 1.69 million.
Federal Reserve Announcement
FOMC hikes policy rate by 25 basis points, cautions on bank stress (TD Bank) - This was one of the most contentious decisions the Fed has had to make. When inflation was its singular focus over the last year, raising rates was the only option. But now that the stability of the financial system has been brought to the forefront, the Fed is having to toe a fine line. By raising rates, while focusing the statement on the tail risks, it is acknowledging the flow through of financial market stress on the broader economy.
FOMC Policy Announcement and SEP — Banking Stress, Maybe Hike Less (BMO) - Today’s rate hike lifts the fed funds target range to 4.75%-to-5.00% and brings cumulative tightening to 475 bps. The former is the highest since 2007 (just before the Global Financial Crisis and Great Recession); the latter is the largest since the Fed began targeting fed funds in the 1980s. And we still judge the Fed could have one more quarter-point move up its sleeve, before pausing for the remainder of the year in the wake of an unfolding mild recession and further disinflation. This economic scenario is reinforced by the growth dampening impact of banking sector stress and tighter financial conditions.
Fed hikes interest rates by 25bp, but acknowledges we are close to the peak (ING) - The Federal Reserve has raised the policy rate by 25bp, but signalled it 'may' only hike once more. This is a little more dovish than anticipated, but the Fed is not expecting recent banking woes to significantly derail the economy. We are more cautious and fear a tightening of credit conditions raises the chances of a hard landing for the economy.
Fed decides to walk and chew gum at the same time (CIBC) - The Fed decided that it could indeed walk and chew gum at the same time, pressing on with a quarter point rate hike to quell inflation, and clearly relying on its lending facilities to address concerns over financial system stability. The rate hike was a unanimous vote, but still reflected a view that banking issues are a new drag on growth and lending activity, since the committee was clearly aiming at a 50 basis point move before the news broke about regional banks. Powell said just as much at the press conference.
The Fed Raises Again but Takes a More Dovish Tone (NAHB) - The Federal Reserve’s monetary policy committee raised the federal funds target rate by 25 basis points but indicated that it was moving to a more data dependent mode as markets digest incoming risks for banks. The Fed is balancing two economic risks: ongoing elevated inflation and emerging risks to the banking system. Chair Powell noted that near-term uncertainty is high due to these risks, as well as impacts from policy actions taken to shore up liquidity.
US | Fed paves the way to wrap up hiking cycle in May (BBVA) - The Fed raised the fed funds rate by 25 bps but struck a more dovish tone. The updated “dot plot” forecasts just one more hike this year, with the median fed funds rate peaking at 5.1%.
All Mixed Up (First Trust Portfolios) - The Fed is all mixed up. The reason it’s mixed up is because in the 2008-09 crisis it abandoned its long tradition of
implementing monetary policy through scarce reserves and imposed a new policy based on abundant reserves. They didn’t know where it was heading at the time; now we’re finding out. The turmoil in the markets isn’t over. We remain cautious on equities and think a recession is on the way.
Fed Weighs Stubborn Inflation Against Banking System Stress (PIMCO) - At its March meeting, the Federal Reserve hiked its policy rate by 25 basis points (bps) while signaling a more cautious outlook as officials grapple with recent banking sector stress amid still elevated inflation.
Research US - Fed review: A cautious 25bp hike (Danske Bank) - Fed hiked by 25bp in line with our expectations, but sent a dovish signal by emphasizing that Fed is ready to pause if credit conditions tighten markedly. We stick to our call for a final 25bp hike in May. We expect the Fed to maintain the policy rate at 5.00-5.25% through 2023.
FOMC Review: Dots unchanged but more uncertain (Nordea) - The FOMC raised the Fed funds target range by 25bp to 4.75-5% while keeping the dot plot unchanged. Higher inflation outlook just two weeks ago has been offset by a likely tightening of credit conditions among banks.
Fed nears the peak in rates (ABN AMRO) - The FOMC raised rates by 25bp last night, taking the target range for the fed funds rate to 4.75-5.00%. This was in line with our and consensus forecasts, though contrary to a significant minority of forecasters who expected the Fed to hold fire.
Fed Hikes 25 and Powell Threads Another Needle (HilltopSecurities) - The FOMC voted unanimously to increase the overnight funds rate by 25 basis points to a new target range of 4.75% to 5.0%, the highest level in over 15 years. The second straight quarter-point move followed a 50 bp move in December and four straight 75 basis point hikes in the preceding meetings. Since last March, the Fed has increased the overnight target by a combined 475 basis points.
US
Americas CIO View: Getting Past the Panic: Mend capital availability, then capital costs (DWS Group) - The US regional bank panic of 2023 is a significant event with long lasting implications. Like past panics, this one will pass too. But with consequences, lessons and changes for banks, the system, regulation and investors. Some of the issues at hand are centuries old.
Labor and Inflation From Top to Bottom (Goldman Sachs) - What would it take to tame inflation? More economic slack and higher unemployment perhaps, but that may only solve part of the problem. In our view, monetary tightening is most effective for addressing the cyclical aspects of demand-driven inflation. Under the hood, there are also structural issues that may keep inflation sticky, such as a mismatch between labor supply and demand and the collective bargaining power of workers. Fiscal and government programs may be better positioned to make progress at the sector and regional level as monetary tightening continues to temper the business cycle and the level of aggregate demand.
The Smoke Signal Is Still Burning: Is Recession Coming? (Wells Fargo) - In 2022, we released a three-report series to showcase useful tools for predicting recessions, the duration of recessions and monetary policy pivots. To quickly summarize, Part I dove into our Probit framework. Part II looked at historical trends with the 10-year/1-year Treasury yield spread. Part III incorporated the prediction power of the fed funds rate and the 10-year Treasury yield. This report presents updated results. In short, all of our tools are signaling a recession is more likely than not within the next year.
What's happening with banks? (Fidelity) - The volatility among bank stocks was triggered by the rapid closure of 2 regional US banks, after customers began quickly withdrawing deposits. In the intervening weeks, investors have seemed to be scrutinizing the strength of financial institutions with new rigor and skepticism—leading to broader volatility.
Existing Home Sales Surge in February: Receding Mortgage Rates Spark a Resurgence in Sales (Wells Fargo) - Existing home sales surged 14.5% in February to a 4.58 million-unit pace, the largest month-over-month increase since December 2015, excluding the pandemic era. The reading surpassed consensus expectations for a solid 5.0% increase. Lower mortgage rates early this year drove a turnaround in mortgage applications for purchase and pending home sales, which presaged the surge in resales.
Canada
BoC Summary of Deliberations (Mar. 8) — Comfortably Paused (BMO) - On March 8, the BoC was content holding policy steady if inflation and growth continued to evolve in line with its forecast. All this was before the flare-up in banking sector worries. The resulting downside risks to the outlook suggest that the Bank should be that much more comfortable holding policy rates steady assuming conditions don't deteriorate further.
Brazil
Brazilian Central Bank Preview - March 2023 (Wells Fargo) - Brazilian Central Bank (BCB) meetings have not yielded many surprises lately; however, with stresses in the global banking sector now present and an economy showing signs of a sharper slowdown, the BCB March 22 meeting may be noteworthy.
Mexico
Mexico | Manufacturing loses dynamism in February; slowdown in the automotive sector (BBVA) - The February figure (2.0% YoY) is the lowest since the end of 2021 and suggests a turning point for manufacturing this year, given the gradual deceleration in external demand.
Emerging Markets
Centrifugal emerging markets (Allianz) - Crisis after crisis, emerging market economies (EMs) have questioned a global financial system dominated by advanced economies and anchored to the US financial cycle. From pandemic-strained supply chains, over exposed flaws in energy markets and sanctions coordination, to the most recent tremors in the banking sector—fragmentation seems to become inevitable. In the meantime, China and several larger EMs have become more deliberate and strategic in promoting initiatives to achieve greater monetary sovereignty and reducing their dependence on cross-border capital flows from advanced economies.
Subscribe to receive Econ Mornings every weekday at 9 am. More economic and finance content on Twitter, Reddit, and my website.