The Bank of England has stepped up its battle against high UK inflation with a 75 basis point hike in rates today. This move takes UK interest rates to 3%, following on from the 50 basis point increase in September.
Monetary policy committee members vote 7-2 in favour of an increase from 2.25% to 3%, with two members wanting a more modest rise, or 50 and 25 basis points respectively.
While a steep hike was expected today, inflation watchers are more keen to hear the Bank’s detailed outlooks, a report it delivers quarterly. Inflation is expected to hit just under 11% in the final quarter of 2022, from 10.1% in September, and this will be lower than expected because of the government’s Energy Price Guarantee (since curtailed by chancellor Jeremy Hunt). This peak inflation forecast is lower than in August.
While inflation remains stubbornly high in the US, Eurozone and UK, the Bank is maintaining the forecast that this will ease next year: “In the MPC’s central projection, CPI inflation starts to fall back from early next year as previous increases in energy prices drop out of the annual comparison. Domestic inflationary pressures remain strong in coming quarters and then subside. CPI inflation is projected to fall sharply to some way below the 2% target in two years’ time, and further below the target in three years’ time.” (Author’s emphasis.)
While the Fed didn’t pivot, is there any sign of the Bank doing so? Today’s rise “will most likely mark the peak in pace of tightening, especially with the Bank highlighting financial markets are pricing too much too soon”, says Edward Hutchings, Head of Rates at Aviva Investors. Current market projections imply interest rates of 3% in Q4 this year (the current quarter), rising to 5.2% this time next year but dropping back to 4.7% in the final three months of 2024. Rate expectations spiked during the September/October chaos but they have since dropped back as gilt yields have relented.
Next Up: Jeremy Hunt
September’s MPC meeting was the Bank’s most recent and fell just a day before the ill-fated mini-Budget, which triggered political and market chaos. While the Bank did not bow to pressure to make an emergency rate increase in the intervening period, it did step in on a number of occasions to shore up confidence in the government bond market as a buyer of last resort.
The Bank referenced this political drama obliquely in today’s statement, with “UK-specific factor” doing some heavy lifting: “There have been large moves in UK asset prices since the August Report. These partly reflect global developments, although UK-specific factors have played a very significant role during this period.”
These forecasts do not take into account the government’s fiscal plans and OBR predictions due on November 17, an autumn statement delayed from October 31 while the new prime minister, Rishi Sunak and chancellor, Jeremy Hunt, get their ducks in a row. While the sense of national emergency in the Truss/Kwarteng era has subsided, the markets are eagerly awaiting the details of November’s fiscal statement, where tax rises and government spending cuts are expected.
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