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United Kingdom Monetary Policy February 2022

United Kingdom: BoE hikes rates in February, begins to wind down asset program

On 3 February, the Bank of England (BoE) increased the bank rate from 0.25% to 0.50%, marking the second successive rate hike. Close to half the members of the monetary policy committee voted to raise rates even further, to 0.75%. The BoE also decided to wind down its asset purchasing program, by ceasing to reinvest maturing assets and announcing it would establish a program of corporate bond sales to be completed no earlier than towards end-2023.

The Bank’s decision was driven by the desire to rein in surging inflation, which rose to a multi-decade high in December. The BoE sees inflation increasing even further early this year, peaking at over 7.0% in April due to the impact of high energy prices. Costlier energy will feed through into a higher utility price cap following a re-rating of the cap by the UK’s energy regulator Ofgem from this April. In addition, the labor market is fairly tight, with the unemployment rate only marginally above its pre-pandemic level, providing the leeway to withdraw some stimulus.

The Bank’s forward guidance was hawkish, with the communiqué stating that “some further modest tightening in monetary policy is likely to be appropriate in the coming months”. This is in line with our panelists’ forecasts, which are for at least one more rate hike later this year.

Kallum Pickering, senior economist at Berenberg, gave his outlook for rates:

“Following today’s policy decisions […] we now look for two further 25bp hikes instead of one in 2022. We now expect the BoE to hike the bank rate by 25bps in both May and August to take the bank rate to 1.00% by year-end.”

Daniel Vernazza, chief international economist at UniCredit, was more dovish:

“In our view, another 25bp rate hike is very likely in May, or before. But we still see the peak for the bank rate at 75bp in May, after which inflation will likely fall significantly and concerns will shift to subdued growth.”

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