The Bank of England raised interest rates for a 12th consecutive time by a quarter of a percentage point to 4.5%, the highest level since 2008, and warned that “if there were to be evidence of more persistent [inflationary] pressure, then further tightening in monetary policy would be required”.
The hike, which was expected by the market, was voted through by a 7-2 majority with Dhingra and Tenreyro voting for unchanged, as the central bank’s Monetary Policy Committee said the rise was needed to bring inflation back under control.
Inflation is too high. It’s been around 10% since last summer. Higher energy and goods prices are the main reasons why inflation is well above our 2% target. https://t.co/zsyOpkm1FD #MonetaryPolicyReport #inflation pic.twitter.com/rgfRVS4aGC— Bank of England (@bankofengland) May 11, 2023
The latest BoE forecasts did not attempt to push back against financial market expectations that there were more rises in the cost of borrowing to come and rates would peak close to 5%, according to the FT.
The BoE revised its short term inflation forecasts significantly higher as it admitted it had previously underestimated the strength and persistence of food price rises. Instead of inflation falling below its 2 per cent target within a year, as it previously forecast, the BoE now thinks it will hit the target only at the start of 2025, after the latest date of the next general election. It now expects inflation to fall from the current 10.1 per cent rate to 5.1 per cent in the fourth quarter of the year, instead of its previous forecast of 3.9 per cent. Any further deterioration in the inflation outlook would leave UK prime minister Rishi Sunak missing his pledge to halve inflation by the end of the year.
However, the forecast also predicted the biggest GDP forecast upgrade on record and, unlike the Fed, the bank now thinks the UK economy will avoid a recession relatively comfortably, forecasting that by mid-2026 gross domestic product will be 2.25 per cent larger than it expected in February.
And while the BoE thinks food price inflation will no longer be driving overall price rises in a year’s time, it now expects that the general improvement in the economic outlook will mean that inflation will be above target subsequently.
⚠️ MPC capitulates on UK recession call. 7-2 vote for a 25bps hike. Details are as expected - enough guidance to say we may or may not do more. Don't see enough in here to reprice 5% terminal rates higher. But maybe BoE won't push back forcefully. Back to watching macro data $GBP pic.twitter.com/BYZ5Rz3mty— Viraj Patel (@VPatelFX) May 11, 2023
BoE officials stressed that the growth forecast was still weak with annual growth rates struggling to exceed 1% over the next three years while unemployment would edge higher from 3.8% at present to 4.5% by 2026.
Meanwhile, the main effects of the rises in interest rates from 0.1% in December 2021 to 4.5% have not yet been felt by households, the BoE said in its monetary policy report, with only a third of the full impact in place.
As Newsqawk summarizes, the policy announcement takes a hawkish, skew with the BoE increasing its inflation forecasts and markedly lifting the GDP assessment by the largest magnitude on record and (as expected) no longer show a recession for the UK. Additionally, the Bank retained the guidance line that "if there were evidence of more persistent price pressures, further tightening would be required."
Given the reiteration of the forward-guidance line from the BoE on price pressures in tandem with the most recent CPI print and the elevated forecasts, alongside the stronger growth backdrop giving the BoE sufficient policy cover, the bias may be for further tightening. Indeed, market pricing indicates a 25bp hike by the August gathering and a terminal just above the 4.75% mark at ~4.85%.
In kneejerk response, gilt futures fell from 101.16 to 100.93 before extending to lows of 100.71 shortly after while cable jumped from 1.2570 to 1.2615 before paring the gains.
Meanwhile, money market are implying a 65% chance of a hike at the June 22 meeting with the terminal rate now priced at 4.87% vs 4.83% before the announcement.