• A Divided MPC
• Time to Look at Gilt Market
• Poor commitment drives weaker pound

A Divided MPC

As expected, the Bank of England (BoE) hiked its policy rates by a further 50bps while some were pricing for a larger move given what other central banks have done recently. With the 50bps hike, the key interest rate to 2.25%, taking it to the highest level since late 2008.

The BoE move follows the US Fed’s decision on Wednesday to raise its key rate by 75bps, as central banks worldwide grapple with postCOVID labour shortages and the impact of Russia's invasion of Ukraine on energy prices.

Should the outlook on inflation remains persistent including from stronger demand, we expect the BoE to respond forcefully.

But what stands out most from this decision is that the BoE’s Monetary Policy Committee (MPC) is becoming more divided. Five policymakers voted to increase rates by 50bps, the same move as the previous meeting; three wanted a more aggressive increase of 75bps; and one person voted for just 25bps, arguing that economic activity was already weakening, and future inflation risks were waning.

While this may not be a surprise, it is for the first time since the great financial crisis, we have a three-way split. This increasing divide is a sign that market expectations are unlikely to be met.

The MPC statement cited that extra government spending will lead to higher medium-term inflation, given that it should dramatically lower the risk of a deep recession. And the government’s energy price guarantee - which caps prices for households and businesses this winter - reduces the risk of inflation expectations becoming deanchored. Headline inflation will be around 5 percentage points lower by January compared to a scenario without the price cap.

We now expect the BoE will hike by 50bps again in November, and by at least 25bps if not 50bps again in December. That would take Bank Rate a little above 3.00%-3.25%.

The BoE’s tone of the statement is being viewed as hawkish — citing strong inflation and pointing out that the energy price guarantee would add to inflationary pressure in the medium term.

And the three MPC members voted for a 75bps hike suggest there are more room for larger rises of more than the 50bps. It now appears to be a standard increment at both the Fed and the ECB.

Source: AmInvest Research - 23 Sept 2022