Bank of England: A 15-year high

02 February 2023

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 2 February 2023. Past performance is never a guarantee of future performance.

Faced with stubbornly high inflation of 10.5%, the Bank of England today opted for another 0.5% rate rise, taking the base rate to 4%.

In doing so, it achieved two uncomfortable milestones – the highest base rate in 15 years, and the tenth consecutive rate hike.   

It caps a gloomy week for the UK, with the International Monetary Fund having downgraded the country’s growth forecasts, and amid large public sector strikes in disputes over pay.

Better times ahead? 

The decision to hike mirrored yesterday’s news from the US, where the US Federal Reserve also opted to keep raising rates in the face of entrenched inflation, albeit in smaller increments – see Fed: A more-but-less approach for more information. 

While today’s decision heaps more pain on UK mortgage holders, there was at least a glimmer of hope in the commentary that accompanied the rate rise. Emerging signs that domestic inflation continues to ease, point to the end of aggressive rate hikes being in sight.  

Nonetheless, the BoE’s statement was clear that uncertainty remains a problem: “Headline CPI inflation has begun to edge back and is likely to fall sharply over the rest of the year as a result of past movements in energy and other goods prices… The extent to which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far. There are considerable uncertainties around the outlook1.”

Mixed opinions 

Tellingly, the Monetary Policy Committee (MPC) remains divided on the best course of action to take, with a split 7-2 vote behind today’s rise. Swati Dhingra and Silvana Tenreyro were two contrarian voting members, each believing that no rise was needed and that a base rate of 3.50% was sufficient. 

MPC members know all too well that they walk a fine line between fighting inflation and staving off recession risk. The central bank acknowledged the predicament: “UK domestic inflationary pressures have been firmer than expected. Both private sector regular pay growth and services CPI inflation have been notably higher than forecast in the November Monetary Policy Report. The labour market remains tight by historical standards, although it has started to loosen and some survey indicators of wage growth have eased, alongside a gradual decline in underlying output1.” 

Domestic strife

Despite a relatively strong bounce back when lockdown restrictions were lifted, the UK economy faces a tough few months ahead, with the risk of a recession this year growing.  

While any slowdown will likely be shallow and relatively quick, domestic conditions contrast with the US and Europe where relatively more economic optimism seems to abound.

The UK government has already indicated that it sees little flexibility with fiscal policy, ruling out significant tax cuts in the next budget. In parallel, the Bank of England knows that rate rises are heaping pain on homeowners and businesses, and it won’t want to be too aggressive with its monetary policy.  

On the plus side, the worst of the inflation battle appears to be over. Investors will be relieved.

Please note: Market Perspectives returns on the 6 February 2023.

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