The Bank of England today voted 5-4 in favour of raising Bank Rate by 50bps to 2.25%. Amongst the dissenters, only newly appointed external member Swati Dhingra voted in favour of a smaller 25bp hike, with Ramsden, Haskel and Mann all voting in favour of 75bps.
Although the decision to hike rates by half a percent undershot market pricing, which assigned a roughly 60% probability of 75bps, the hawkish connotations scattered amongst the rate statement and meeting minutes have kept the Bank’s implied rate path further out largely intact. Following the announcement, markets trimmed their expectations of the Bank’s hiking path for the remainder of this year, with the year-end implied rate now trading 14bps lower at 3.6% (75bps in November and a 60% probability of 75bps in December), but maintained their view of Bank Rate peaking close to 5% in the middle months of next year.
While much depends on the extent of the fiscal easing announced in tomorrow’s mini-budget, we think the BoE’s bias is to increase the pace of its hiking cycle in November with a 75bp hike in order to mitigate against rising core services inflation and increased persistence.
As mentioned, the Bank’s hawkish bias was littered throughout today’s announcements. Firstly, not only did more MPC members dissent in favour of a 75bp hike relative to the majority of sell-side estimates, but the Committee also followed through on their previous proposal to begin actively selling gilts as early as October.
In and of itself, this decision suggests the Bank is firmly committed to keeping monetary conditions tight, irrespective of analyst concerns over the increase in gilt issuance that could be signalled tomorrow by the Chancellor. Compounding these hawkish signals was commentary within the rate statement regarding the Bank’s preliminary assessment of the impact the latest Government support measures would have on inflation.
While the Bank is awaiting tomorrow’s mini-budget to formally compute the impact in November’s Monetary Policy Report, and thus adjust policy accordingly, it has already outlined its view that these measures pose substantial upside risks to the medium-term inflation projections, as they would fuel household spending and raise core CPI. Finally, the BoE maintained its commitment to “respond forcefully” to signs of stronger demand and more persistent inflation pressures.
In response to today’s BoE decision, the pound tracked near-term money market pricing lower as GBPUSD erased its pre-BoE rally.
The move was minor, however, and confirms our view heading into this week that Friday’s mini-budget would be more decisive for GBP crosses than the BoE meeting. Should Chancellor Kwarteng loosen the fiscal purse strings to such an extent that it ushers in renewed concerns over fiscal sustainability and resurrects worries over the UK’s current account deficit, further GBP downside is likely to be exhibited irrespective of the Bank of England’s implied rate path. However, a more fiscally sustainable stimulus package, with offsetting government spending measures, would likely provide GBP with some upside as the measures would not only reinforce foreign investor sentiment over UK assets, but also provide the BoE a clearer path to underpin their returns with higher interest rates.
Sterling follows Dec 2022 rates lower following the BoE’s decision to hike by 50bps, but the moves are minor compared to what we may see tomorrow around the mini-budget announcement
Simon Harvey, Head of FX Analysis