The BoE hikes rates and signals more to come
The BoE raised rates for the first time since 2023 and Governor Bailey signalled a further rate rise.
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After recently warning about the risk of higher rates, the Bank of England raised the policy rate by 25bp from 3¾% to 4% because of high inflation and upside risks to inflation from high energy prices (“the duration and scale of the energy price increase had generated sufficient inflationary pressures in the pipeline to warrant an increase in bank rate”). Contrasting with expectations that some policymakers might vote to keep rates on hold, the decision to raise rates was unanimous, although there was a split in views over the size of the rate rise, with one policymaker voting for a 50bp increase (Mann). Governor Bailey pointed to a further rate rise, with the next two policy meetings scheduled for 17 December and 4 February.
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The BoE signalled a further hike was likely.
Governor Bailey pointed to another rate hike, saying, “without news which softens the risks to inflationary pressures, I can see the argument for a further increase in rates and thereafter taking a more conditional approach, dependent on the evidence on energy prices and inflation dynamics.” Simple policy rules based on the BoE’s economic outlook had pointed to a period of unchanged rates, although such rules are less reliable in the UK than in other countries given the uncertainty around estimating the UK NAIRU. The BoE forecasts were conditional on a market path showing interest rates peaking at almost 5% late next year.
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Upside risks to inflation from energy prices had increased.
There was “still limited evidence to date of second-round effects in wage and price-setting”, but “second-round effects were likely to be state-dependent and the outlook for headline inflation had risen materially”, such that the Monetary Policy Committee “judged that the risk of material second-round effects emerging had risen further since September and could remain a risk for some time”.
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The BoE expects slightly higher core inflation and the recent decline in unemployment to be reversed.
The BoE now expects a much higher peak in headline inflation of 4.9% (previously 3.2%), with inflation not returning to the 2% target until late 2028 (previously early 2028). The BoE only publishes a near-term outlook for core inflation, which is now expected to reach 3.2% by early next year (previously a peak of 2.8%). The recent decline in the unemployment rate is expected to be reversed, with unemployment holding around the 5% level over most of the forecast horizon (previously a peak of 5.3% and then holding around 5%).
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
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