BoE surprises the markets with a 50bps interest rate hike

The larger then expected hike demonstrates, at a minimum, that the MPC remains determined to bring domestically-generated inflation (at least) back under control

By Stuart Cole | @Stuart Cole | 22 June 2023


The Bank of England surprised the markets today with a 50bps interest rate rise. Although talk had been circulating concerning the likelihood of such an increase, market expectations had remained largely positioned for a 25bps increase; the 7-2 vote in favour of the larger hike was unexpected.

One of the first questions that arises in light of today’s decision is whether the move is indicative of a sense of panic starting to emerge inside the Monetary Policy Committee that the battle to contain inflation is being lost. Certainly today’s move demonstrates, at a minimum, an attempt by the MPC to show that it remains determined to bring domestically-generated inflation (at least) back under control and is willing to take the steps considered necessary to achieve this. The fact that seven members of the Committee voted for today’s larger rise suggests the MPC has shifted its central position towards the more ‘hawkish’ end of the policy spectrum; whether or not this represents a scramble to try and get back ahead of the policy curve is more open to debate. And it is a valid question to ask why two MPC members thought that the prudent thing to do today was to keep interest rates on hold - given the uncertain economic outlook the UK is facing, you would prefer all members of the MPC to be singing from the same hymn sheet. Maybe these two voters (Dhingra and Tenreyro) so far feel no need to panic?

But if the need to start restoring credibility was an objective, then the reaction of the market appears to suggest it has been successful. Sterling is trading largely unchanged from where it was before the meeting, while short end yields are only around 5bps higher than where they were this morning, suggesting today’s move has not delivered a large shock to the market. However, the risk of the BoE ultimately driving the UK economy into a recession is seen as growing, with medium and longer term yields all moving lower.

Alongside the larger hike, the language surrounding it also suggested the MPC expects interest rates to be raised further. Although the Committee continued to note that further increases in Bank Rate would be dependent upon “…evidence of more persistent (inflationary) pressures….”, if it felt uncomfortable with the market now pricing in a terminal rate of just over 6%, then it chose not to mention it. The conclusion is clearly that monetary policy is expected to be tightened further going forward and that inflation is going to take a period of time to bring back under control. This nod to more persistent inflation, and in light of today’s move, should put everyone on notice that the MPC has overcome its previous reluctance to take more aggressive action.

As already noted, a terminal rate of 6.06% is now being priced in by the market, a rise of some 20bps since just the start of this week. However, with a broad range of leading indicators suggesting that a loosening in the labour market is still expected to be seen over the remainder of this year, alongside a slowdown in wages growth and weakening in core goods inflation, a further 106bps of tightening looks to be a tad over-optimistic. The suggestion is that a terminal rate closer to 5.75% will ultimately cap this tightening cycle.