The Bank of England announced on Thursday a 50 bps rate hike. Five members of the Monetary Policy Committee voted for that decision, three members wanted at 75 bps hike and one member a 25 hike. According to analysts at Rabobank, the slip decision reflects a very uncertain economic outlook. They point out that strong fiscal easing opens the door to a 75 bps increase in November, especially if the market believes the government borrows too much. But they consider the uncertain growth and inflation outlook continues to favor a more gradual rather than a frontloaded approach.
“The Monetary Policy Committee voted to raise the benchmark rate to 2.25% from 1.75%. There was a 3-5-1 split, reflecting uncertainty even as the eventual vote was in line with consensus and our own expectation of a 50 bps hike. Market participants were positioned for a 75 bps increase going into this meeting, following similar recent increases on the part of the Federal Reserve and the European Central Bank. The minutes were, however, seen as fairly hawkish, prompting another leg higher in yields.”
“We stick to our rationale that the change in the expected inflation profile – certainly significantly lower energy-driven inflation in the short-term; probably more persistent demand-driven inflation in the medium-term – should keep the Bank of England on a more gradual but also a more sustained path of rate increases. We therefore call for another 50 bps increase in November.”
“The Bank of England can, however, only maintain such a relatively gradual pace of interest rate increases (vis-à-vis other central banks!) if Truss and her team are able to reassure markets that she has a plan on how she will eventually provide balance in public spending. Today’s price action, with large spikes in gilt yields, shows that just the promise of more growth is certainly not enough.”