A divided central bank
What stands out most from this decision is that the Bank of England's Monetary Policy Committee is becoming more divided. It’s no surprise that three hawks voted to hike rates by 75bp, not least given some have been vocal about the implications of sterling's weakness this year. But for the first time since the great financial crisis, we have a three-way split. One dove, Swati Dhingra, voted to hike by ‘only’ 25bp, signalling she’s worried about the demand outlook.
For investors, this increasing divide should be seen as a sign that market expectations are unlikely to be met. Swap markets are now pricing a peak for the Bank Rate close to 5% next year.
This increasing divide is a sign that market expectations are unlikely to be met
Admittedly the statement makes it clear that extra government spending, and we'll get more details on that tomorrow, will lead to higher medium-term inflation, given that it should dramatically lower the risk of a deep recession. But the accompanying meeting minutes also explicitly highlight that the government’s energy price guarantee - which caps prices for households and businesses this winter - reduces the risk of inflation expectations becoming de-anchored. Headline inflation will be around 5pp lower by January compared to a scenario without the price cap.
A 75bp move later this year can’t be ruled out, and it’s clear the bank is delaying some judgement on the government’s fiscal plans until it has had a chance to update its forecasts ahead of the November meeting.
But Thursday’s decision makes us more comfortable with our existing call that the BoE will simply hike by 50bp again in November, and by at least 25bp if not 50bp again in December. That would take Bank Rate a little above 3%.