The Bank of England raised interest rates by 75 basis points, aligning with the jumbo hikes made in recent months by the Fed and the ECB. But the statement accompanying the decision suggests a different, decidedly dovish approach in the future.
The 75 basis point increase brings the bank rate to 3%. It is the eighth consecutive increase and brings rates to the highest level in 14 years.
The Monetary Policy Committee (MPC) has in fact signaled a lot of caution on the next moves as it fears a prolonged recession. “The latest MPC projections describe a very challenging outlook for the UK economy,” the BOE said in a statement. The forecast is that the UK will be in recession for an extended period (throughout 2023 and the first half of 2024).
The reaction of the markets was of strong sales on the pound, down 2% against the dollar.
More substantial rise since 1989, but it will be an isolated event
Today’s +75bps move will likely not be replicated in the future by the Boe. New BoE projections show that if policy makers were to follow investors’ expectations and raise rates to 5%, the economy in terms of GDP would shrink by around 3 percentage points over several quarters and inflation would be zero. in 2025.
Conversely, a prospect based on rates that remain at the current 3% level implies a shorter and shallower recession and sees inflation falling close to target in two years.
The governor of the Boe, Andrew Bailey, he was very blunt that rates are unlikely to rise as much as markets expect (currently just under 5%). Furthermore, the committee is very divided with two members voting for smaller increases (one board member voted for +50bps and one for +25bps).
“The choice that the Boe will have to face in upcoming meetings is to take an aggressive hike to protect the pound, or to act more cautiously to allow for a gradual decline in mortgage rates. With about a third of UK mortgages set for just two years, we suspect the latter option will increasingly be seen as more attractive, ”argues James Smith, an economist at Ing who expects a 50 basis point rate hike in December and believes the bank rate is unlikely to exceed 4% next year.
Stinging on UK mortgages
Today’s move will immediately add around £ 115 to the monthly bills of a homeowner with a £ 300,000 home loan with rates moving in line with the Boe and with 20 years left to pay. Over the past year, monthly bills have increased by £ 420 (from £ 1,359 to £ 1,779) for homeowners with a mortgage of this size. For a homeowner on a £ 500,000 loan – which is not unusual in London – Thursday’s increase will add £ 191 per month to their monthly bills, bringing them to £ 2,964.