BOE Hikes Rates by 50bp as Agents Survey Remains Strong

The BOE’s Agents survey demonstrates that demand for consumer goods, consumer services and total services including exports have very strong - top 10 percentile standings. Total business services have a top 30-percentile standing. While inflation is flaring sharply, demand remains strong underlining that BOE policy may still have some ways to go to corral and reduce inflation.

Demand in the U.K. is strong, but output has a weaker standing in its 40th percentile, below its historic median. Exports of manufacturing goods are near their historic median (a 50% standing) while the construction sector in the U.K. is weak, at a bottom 10-percentile standing. Still, investment activity is rated at a still-solid 68-percentile standing.

Costs of imports, materials, and labor costs show historic standings in their top 20% to 15% to 3% with labor showing the strongest relative standing. Labor costs are a particularly pressing problem in historic profile. Prices have an even higher, top one-percentile standing: this applies to domestic prices, consumer goods, consumer services, and business-to-business services. In this environment, business profit margins are at a sub-30-percentiel standing.

The labor markets report recruiting difficulties at a 79-percentile standing and employment intentions are weaker, just below their historic median. Businesses report capital usage at only a 70th percentile standing.

In this environment with interest rates rising and inflation flaring, small, medium, and large businesses all report credit availability as challenging with low standings below the 15-percentile mark for businesses of all sizes and with large businesses reporting the most severe problem, but by only a small margin.

The Bank of England hiked its key rate by 50bp today as this week’s inflation report showed surprising strength in inflation. Other large G10 countries have inflation problems as well; but the U.S. and Germany, in particular, show core inflation to have turned a corner, something that has not happened in yet in the U.K. and that has become a real sticking point for policy. Central banks in this Covid/post-Covid cycle have uniformly underperformed on their inflation objectives and underestimated the strength of inflation. They have fallen behind in setting anti-inflation policies. The theme of misjudged inflation risk and a tardy response continues to run hot as central bankers scramble to control and suppress inflation as well as reconstitute their reputations. They have a long way to go. A long period of inflation fighting success can burnish a central bank’s reputation, but a short period of badly missing on inflation performance can destroy it.