• BOE lifted its key policy rate by 75bps, taking the rate to 3.0%

• The BOE is forecasting a deep recession regardless of whether it hikes any further

• Central bank signals interest rates probably would not go much higher

• A 75bps hike is likely to be a one-off

The Bank of England (BOE) jacked up interest rates at the fastest pace since the 1980s, seeking to slam the brakes on stubbornly high inflation even as Britain faces what could be one of its longest-ever recessions. The Bank's monetary policy committee (MPC) upped its benchmark rate by 0.75 percentage points to 3.0%, that pushed the rate to its highest in 14 years.

Despite the bank's eighth consecutive interest-rate increase, its MPC signalled that it does not expect to continue to increase borrowing costs by as much as investors anticipate to tame inflation. "The MPC's latest projections describe a very challenging outlook for the UK economy”, the BOE said in a statement. "It is expected to be in recession for a prolonged period”.

The UK central bank's policy decision comes after a period of economic and political turbulence triggered by a surprise package of tax cuts announced by former Prime Minister Liz Truss in late September. The absence of a plan to contain government borrowing over the medium-term spooked investors, leading to a collapse in government-bond prices and the departure of Ms. Truss a month later. The BOE bought government bonds to prevent a market meltdown.

Since then, the UK government has shelved the tax-cut plans and vowed a series of tax increases and spending cuts that it says will lower debt as a share of the economy later this decade, easing pressure on the central bank to try to offset the inflationary impact of Ms. Truss's plans through far larger rate increases. The central bank said it had not taken account of those planned moves in its decision in November, but will do when it next decides policy in December.

Source: BIMB Securities Research - 4 Nov 2022