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United Kingdom Monetary Policy August 2023

United Kingdom: BoE hikes by 25 basis points in August

On 3 August, the Bank of England (BoE) increased the bank rate from 5.00% to 5.25%, taking total tightening in the current cycle to 515 basis points.

The main driver of the decision was the desire to tame price pressures: Headline inflation was still around four times higher than the BoE’s 2% target in June, with core inflation more than triple the target. The Bank also commented that recent wage growth had been higher than it expected, and judged risks to the inflation outlook to be skewed to the upside. That said, the fact that inflation undershot market expectations in June likely dissuaded the Bank from hiking rates by 50 basis points.

In its communiqué, the Bank reiterated its willingness to hike further if required, but sounded a more dovish note than at the prior meeting by describing the current level of interest rates as “restrictive”. The Consensus is for at least one more rate hike later this year, with a hike at the next meeting in late-September a near certainty.

On the outlook, analysts at ING said:

“Another hike in September seems likely, but by November we think the news on services inflation and wage growth should be looking a little better. The former has risen in no small part because of higher energy bills, and, according to ONS surveys, the pressure on service sector companies to aggressively raise prices is abating. […] our base case for now is that 5.50% in September will mark the peak for Bank Rate.”

Goldman Sachs analysts are more hawkish:

“Given our forecast for resilient activity and a gradual cooling in wage and services inflation, we maintain our forecast for two more 25bp hikes to 5.75% in November. We believe that significant progress on cooling wage growth—together with continued labour market rebalancing and receding services price pressures—is needed before the MPC considers a pause.”

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