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United Kingdom Monetary Policy September 2022

United Kingdom: BoE hikes by 50 basis points in September

On 22 September, the Bank of England (BoE) increased the bank rate from 1.75% to 2.25%, marking the seventh successive rate hike. Three Bank members voted to raise rates by 75 basis points. The BoE also announced it would reduce the stock of purchased government bonds by GBP 80 billion over the next year.

The Bank’s decision to tighten its stance was driven by the desire to avoid currently high inflation becoming entrenched. Moreover, despite the government’s recent energy price cap, energy bills are set to rise further in the coming months, which will feed through to headline inflation. The Central Bank also commented that the labor market was tight and that recent nominal wage growth had been faster than expected.

The Bank reiterated that it was prepared to act “forcefully” if high inflation persisted, specifically highlighting demand-driven price pressures as a risk. The Consensus is for around 75 basis points of additional tightening by year-end, although the discrepancy among analysts is large, with forecasts ranging from 25 to 150 basis points of extra tightening.

Analysts at Nomura gave their outlook for rates:

“The Bank will raise rates in 50bp clips for the remaining two meetings of the year (November, December). After that we see a reversion to 25bp hikes in Q1 2023 (February, March), as the Bank ‘feels its way’ towards/above neutral. We continue to see rate cuts from H2 2023 based on our view of recession dragging and inflation falling.”

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