As expected, the Bank of England raised rates by 25bps to a new 15-year high of 5.25%. This was the baseline assumption given an expectation that we could see further sharp falls in the CPI headline rate in just under 2 weeks’ time when we get July CPI numbers, and the lower energy price cap kicks in.
There was a 3-way split on the voting with Catherine Mann and Jonathan Haskell voting for a 50bps move, while external MPC member Swati Dhingra maintained her no change stance.
The bank also downgraded its expectation for GDP growth for this year to 0.5% from 0.75%. They also downgraded their end of year inflation forecast to below 5%.
The pound had already been trading lower in the leadup to the decision and has remained weak as markets price in the prospect that the terminal rate could be lower. This has softened below 5.7%.
New MPC member Megan Greene, who replaced dove Silvana Tenreyro adopted a more hawkish position, going with the majority of a 25bps move.
It was also noteworthy that the bank said that rates would need to stay sufficiently restrictive for longer to be able to return inflation to its 2% target, which reading between the lines suggests that rates could be close to their peak. Deputy Governor Ben Broadbent more or less admitted this with his comments that UK policy was restrictive already, and that UK rates are now likely above the neutral rate.
Time will tell, but with another 2 CPI reports to come before the September meeting there is a chance that today’s hike could well have been the final one of this cycle. UK gilt yields appear to be pricing that prospect already with 2-year yields below 4.9% and down 10bps on the day.
Today’s decision by the central bank has prompted a modest rebound in housing and banking stocks off the lows of the day, as traders take the view that the Bank of England is close to calling a pause on further rate hikes.
There are some important caveats to a possible pause, with the governor warning that services price inflation has been much more persistent, but with the long and variable lags that monetary policy operates in, the bank needs to be careful about pushing its luck when it comes to further rate hikes, given the fragile nature of the UK economy as well as the housing market.
The central bank needs to look more carefully at PPI in terms of the likely direction of headline CPI where we have already seen negative readings in both output and input prices.
