Bank of England opts for quarter-point rise
- Base rate lifted to 5.25%
- Sterling was trading at month’s low ahead of rate decision
- 14th hike in a row, taking rates to highest level in fifteen years
- Gilts react positively with 2 and 5 year yields dipping slightly
- Policy makers were split three ways in their vote
- Rates may rise further if inflation persists, say MPC
Steve Clayton, head of equity funds, Hargreaves Lansdown: “This was a tough call for the Bank’s policy committee. In the end, six members voted for the quarter-point hike, two for a half-point, with only one voting not to raise at all. Inflation data has been improving, but the economy remains stronger than many expected. In the end, the Bank opted to play it safe. A quarter-point rise keeps the pressure on – but does not add too much to the heat.
In their commentary, the MPC highlighted that market expectations for future levels of rates had risen sharply, to average almost 5.5% over the next three years, with a peak level of just over 6%. The committee pointed out the increasing conflicts in the data. They stressed that pay growth in particular, at 7.7%, is far ahead of their earlier expectations and risks embedding elevated inflationary expectations into the economy.
Inflation is seen falling to around 5% by year-end and does not reach the 2% target level until 2025 Q2, with risks on inflation skewed to the upside. The Bank sees its monetary stance as restrictive at these levels but, even so, the MPC stress they are prepared to go further should evidence of more persistent inflationary pressures emerge.
So far, the markets have been relatively approving of today’s move and the MPC’s statement. Gilt yields have fallen a shade, including the 2 and 5 year levels that are important for where fixed rate mortgages may be headed. Sterling took a lurch down, even though it was already at its month’s low against the dollar before recovering a fraction to $1.265. The stock market has, so far, taken the hike positively with the FTSE trimming earlier losses, to stand at 7515 shortly after the announcement.”
