Bank of England: key takeaways and market signals after first hike in 3 years

The Bank of England delivered the expected 25bp hike to 4.0%, but the details lean hawkish. The clearest message is that another hike is very much on the table, probably sooner rather than later, although the MPC is deliberately resisting the idea that this is the start of a conventional hiking cycle.

The hike “should not be seen as the first of an inevitable long sequence of hikes,” Governor Andrew Bailey told the press conference, before adding: “Neither does it seem likely to be the last increase.”

The Bank of England raised rates by 25bps to 4.0% as expected, the first hike in three years. The 8-1 vote signalled a strong consensus behind the move to raise rates, particularly as the dissenter (Mann) voted to increase by 50bps to 4.25%. This is more hawkish than expected, which explains the initial jump in sterling and front-end gilt yields, with the 2yr up a couple of bps to 4.77% on the statement. But a far more nuanced tone was struck in the press conference saw cable pull back to the lows of the session around 1.3456. GBPUSD was sliding away from the 1.35 resistance hit yesterday and again today before the announcement and has found some fresh bid back to 1.3480.

My read: this was hawkish but retains flexibility and there a little more nuance and dovishness from the press conference.

The Bank now sees inflation peaking around 5% in 2027, a fairly hawkish assessment of the path of prices that seems to suggest it's eyeing a second hike as early as December. Whether that's the end of a shallow hiking cycle depends on events in the Middle East, but the BoE noted that the risk of stronger inflationary pressure had increased further since the September meeting. The problem is that the longer headline inflation stays high whilst the economy is resilient, the higher the risk of second order effects. The Bank noted resilience in the economy and tentative signs the softening in the labour was easing off.

1. Inflation outlook has deteriorated materially

• CPI was 3.5% in September and is now forecast to reach roughly 4.5% in Q1 2027 and 5% by Q2.

• The main driver is energy: Brent averaged $108/bbl and UK gas 216p/therm over the Bank's reference period.

• Importantly, the Bank thinks the risk of second-round effects into wages, prices and expectations has increased, even though there is limited evidence of them so far.

Market signal: this is essentially an insurance hike against an energy shock becoming embedded. The more persistent oil and gas prices remain, the greater the likelihood that the BoE needs to tighten again.

2. Another hike looks increasingly likely

Governor Andrew Bailey says that without news that softens inflation risks, "I can see the argument for a further increase in rates". Clare Lombardelli says there is "likely to be a case for a further increase in rates in the near term", while Huw Pill is stronger still, saying a single 25bp hike is unlikely to be sufficient. Megan Greene similarly thinks additional hikes will likely be required.

That gives the statement a noticeably hawkish bias despite the repeated insistence that policy is not on a preset path. Bailey also refused to sign up to the idea of "two and done" hiking cycle. There seems to be plenty of rope here for the MPC on energy pricing and what happens in the Middle East.

My read: 4.25% is becoming the obvious near-term destination, unless energy prices fall sharply (or continue to do so) or UK activity deteriorates.

3. But the MPC explicitly does NOT want markets pricing a full hiking cycle

Alan Taylor, one of the more dovish members of the MPC, sounded like he was speaking for the entire committee:

"It is essential to communicate, and for markets to understand, that, as of now, this is not the start of a hiking cycle: policy isn’t on a pre-set, unconditional path ... Rather, from an already restrictive position, this is a risk-management ‘one-for-now’ insurance hike."

This is a more nuanced outlook and indicates another hike is not nailed on. But that could just be a reflection of dovish outlook than mirroring other members' views.

"The next move could be up, down, or sideways," he says. It's hard to disagree with that.

As noted above, Governor Bailey reiterated this as the central view of the MPC when he said the hike “should not be seen as the first of an inevitable long sequence of hikes".

That matters for the curve. The Bank appears comfortable with markets pricing some additional tightening, but probably not a long sequence of hikes. Taylor pointed out that "the risk is curve dislocation and unwarranted tightening in financial conditions". In the press conference Governor Bailey faced questions on whether the MPC would have hiked if the economic assessments had factored in the recent sharp decline in energy prices in the wake of the Democrats taking Congress.

His view was that the decline in oil prices was "positive news" but did not change the fact that there were “already a significant amount of inflationary pressure in the pipeline”.

4. UK growth is proving more resilient

This added more of a hawkish flavour. The MPC says economic activity has been stronger than expected, consumer demand has held up better than feared and the margin of spare capacity appears to have stabilised. The labour market also looks more resilient.

Several members are questioning whether monetary policy was as restrictive as previously thought. Dave Ramsden for example, says labour-market slack is levelling off and private-sector wage growth has stopped declining.

That reduces the Bank's ability to simply look through the energy shock.

5. The crucial debate has shifted to wages and second-round effects

The MPC repeatedly highlights three things it will watch:

pay → pricing behaviour → economic slack

So, the next phase becomes very data dependent. The key question is whether 5% headline inflation feeds into the 2027 wage round.

Megan Greene notes underlying wage growth remains around 3.5%, above levels consistent with the inflation target. Catherine Mann is much more concerned about inflation expectations and voted for 50bp, taking Bank Rate to 4.25%.

The other key contingency is the situation in the Middle East – a material shift in the geopolitical outlook that pushes down energy prices could see the MPC hold off from pushing for a second hike next month.

What it means for markets

This looks like an unnecessary hike and an unwelcome rise in the cost of living for many households. The sharp fall in oil and gas prices following the US midterm elections came just a day too late for the BoE. The move, driven by the US market, suggests investors there have a much clearer understanding of the implications of the election result for the US-Iran conflict – or at least a better grasp than their European counterparts. Against this backdrop, we could see a material moderation in inflation just as the BoE raises rates, although the Bank is maintaining a high degree of flexibility. 

The BoE could have afforded to leave its benchmark steady at 3.75% until well into 2027, after which the next move should be to cut, although clearly it sees material upside risks to inflation and a breach of its key 4% level after which second order effects start to emerge. Britain's policy rate was already quite restrictive at 3.75% and there is yet no clear evidence of second round impacts on inflation. As I have repeatedly said, this is not 2022.