BOE: Another 50bp hike and we expect more to come

The BOE hiked policy rates by 50bp, bringing the bank rate to 2.25. The extent to which fiscal policy is set to boost demand and hence impact policy setting is still highly uncertain. Call for a 50bp hike in November and December and 25bp in February with risks of skewed towards additional hikes in 2023.

The Bank Of England increased the Bank Rate by 50bp to 2.25% with 5 member voting for 50bp increase, 3 members voting for 75bp and one member voting for 25bp. As expected, BoE announced that outright government bond selling will start with a total reduction in bond holdings of 80 billion pounds over 12 months. The BoE repeated its meeting-by-meeting approach stating that “Policy is not on a pre-set path” giving close to no forward guidance to markets.

One of the key takeaways from the Monetary Policy Summary is that the BoE no longer seem to pencil in a recession by Q4 2022. Note no inflation or growth forecast were published at this interim meeting, but not mentioning a recession gives a hint that the recession won’t hit as soon as BoE predicted in August. This feeds well into our narrative of the Fiscal stimulus providing near-term support to the economy. With newly elected PM Lizz Truss having announced the energy relief plan, which will cap energy prices for households, BoE now sees the peak in CPI inflation to be just below 11% compared to the 13% projected in August.

EUR/GBP initially moved higher upon announcement to 0.8740 from 0.8700. However, the move was overall muted with the cross later settling around 0.8720. We see a case for EUR/GBP to remain elevated in the near-term, but in the longer-term it is expected to cross move lower as expected the positive USD environment to eventual benefit GBP relative to EUR.