Bank of England: Hike humbug or hope?

Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as at Thursday 15 December 2022. Past performance is never a guarantee of future performance.

In a move widely anticipated by markets, the Bank of England’s (BoE) Monetary Policy Committee (MPC) today voted to raise the base rate by 0.5%, taking it to 3.5%. This represents the UK’s highest rate in 14 years, and it was the ninth-consecutive time that the MPC has opted to hike. 

While the decision puts more pressure on the finances of businesses and homeowners, there was a glimmer of hope that domestic inflationary headwinds might start blowing a little softer next year. 

Last month’s equivalent hike was 0.75% so the fact that the MPC decided to shave 0.25% off their December rise, suggests policymakers have seen enough signs of cooling inflation – or at least that a path has been cleared towards lower inflation – to move away from its aggressive hiking policy.

That said, MPC members aren’t entirely united on the best course of action. Today’s hike was passed through on a 6-3 vote, in a change from the 7-2 majority behind last month’s rate rise.  Two of the contrarians (Swati Dhingra and Silvana Tenreyro) voted to keep rates on hold, while Catherine L Mann endorsed a larger 0.75% increase. 

Ending the year on a high, sort of

As we mentioned in a recent article, Bank of England goes large, the decision to raise rates to a 14-year high is largely driven by global inflationary challenges which are forcing the BoE’s hand.  

In an echo of November’s rate hike, today’s decision was preceded by a separate rate rise across the pond. On Wednesday, the US Federal Reserve (Fed) decided to increase its fed funds rate again, while also signalling to financial markets that it was willing to ease off the accelerator next year. (You can read more about that in this article, Fed’s 2022 finale: A hike, obviously).

Like it’s US peer, the UK central bank was at pains to stress that it was too early to relax in the fight against inflation despite the inclination to adopt a less aggressive monetary policy stance in 2023:  “The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response¹.” 

At least it was predictable

In many ways, the rate rise was a fitting way to end 2022 – a year dominated by severe inflationary pressures and a soaring base rate to counter them. It won’t have been a decision taken lightly by the BoE as it struggles to balance inflation with the economic fallout. 

As captured in the MPC minutes: “There are considerable uncertainties around the outlook. The Committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary.¹”

While the year might be ending on a tough note, there is at least some consolation in the fact that key policymakers are no longer at loggerheads with one another. The ruinous ‘mini budget’ in September put UK markets, as well as government and central bank relations, under severe strain. That discord appears to have vanished, freeing up the BoE and the government to focus on their respective economic challenges. 

Tough times ahead

Broadly speaking, investors will be glad to see the back of 2022. The envisaged post-pandemic era of prosperity failed to materialise, with soaring inflation and war in Ukraine leaving brutal marks in more ways than one. 

While the economic storm clouds look set to linger into 2023, there are signs emerging that the worst may be over. Central bankers will certainly be heading into the Christmas holidays hoping they’ve done enough to avoid a repeat of 2022.

In the meantime, you can read more about our insights on the UK, in this year’s Outlook 2023 chapter: UK buckles up for storms ahead  

Please note: This is our final thought leadership article of 2022, unless market events determine otherwise. We’ll return on 9 January 2022 with the launch of our latest ‘Investing for Global Impact’ content series. As always, our Private Bank LinkedIn feed will post the very latest thought leadership content, including articles and podcasts.

Related articles

See more

This communication is general in nature and provided for information/educational purposes only. It does not take into account any specific investment objectives, the financial situation or particular needs of any particular person. It not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful for them to access.

This communication has been prepared by Barclays Private Bank (Barclays) and references to Barclays includes any entity within the Barclays group of companies.

This communication:

• is not research nor a product of the Barclays Research department. Any views expressed in these materials may differ from those of the Barclays Research department. All opinions and estimates are given as of the date of the materials and are subject to change. Barclays is not obliged to inform recipients of these materials of any change to such opinions or estimates;
• is not an offer, an invitation or a recommendation to enter into any product or service and does not constitute a solicitation to buy or sell securities, investment advice or a personal recommendation;
• is confidential and no part may be reproduced, distributed or transmitted without the prior written permission of Barclays; and
• has not been reviewed or approved by any regulatory authority.

Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.

Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.

Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.