“The modest extent of the projected rate hikes may be due to the expected weakening of economic growth. The BOE expects the UK economy to return to its pre-pandemic size during 2022 Q1 but now expects there to have been less GDP growth during 2021 (6.7% in the year to 2021 Q4 versus the previous forecast of 8.5%). Further, growth is expected to slip to around 1.0% during 2023 and 2024, with the unemployment rate remaining in the 4.0%-4.5% range over the forecast horizon. The Bank assumes that potential supply growth will slow to around 1.5% (in line with pre-pandemic rates) and that gradual government budget consolidation will be a drag on demand growth.
“The financial market reaction has been as might be expected: sterling has weakened (see above), gilt yields are down (10-yr yield has fallen by around 7bps to 0.98%) and those developments have supported the UK equity market (FTSE 100 futures have gained around 0.4% since the announcement). Surprisingly, given that small/mid cap stocks are less exposed to currency movements, the FTSE 250 index seems to have risen more than the FTSE 100, with a gain of around 0.8% since the announcement.
“In conclusion, the BOE may not have delivered the expected rate hike today (an expectation that the Bank itself encouraged). However, it is suggesting that rate hikes will follow shortly and that there will be roughly 90bps worth of increases between now and the end of 2022. If things stop there, then financial markets are likely to take a serene view of BOE policy. However, we suspect that more rate hikes may be needed (and justified) than is being suggested by the BOE and that could cause financial market volatility further down the road.”
Ed Monk, Associate Director at Fidelity International:
“It seems inevitable that the Bank of England will raise rates at some stage but borrowers have been given a reprieve for now. The MPC appears in wait-and-see mode while supply chain issues and higher global energy prices – factors beyond the control of the Bank – push inflation higher.
“A delay in raising rates is a signal of the conundrum facing rate-setters. They will be uncomfortable that inflation is running so far above target, but also understand they have limited options to bring price rises down. Maintaining rates at their current emergency low level underlines that the Bank still views growth as being fragile.
“Households need to ready themselves for higher borrowing costs arriving at some stage. Taken alongside rising inflation of prices for everyday items like fuel and energy, and with higher National Insurance and frozen Income Tax rates on the way, household budgets are being chipped away from multiple directions. The financial cost of a rise in rates to 0.25%, whenever that does arrive, may be limited but the shift in consumer sentiment it causes may be much bigger.”
