MPC speeds up rate hikes, focusing on inflation risk in the UK

The BoE today announced a 50bp rise in Bank Rate to 1.75%, despite publishing a forecast that suggests the UK is heading into a recession that will produce a significant degree of spare capacity and cause inflation to eventually fall well below the 2% target.

What you will learn:

• MPC policy is now being set to target a risk – that high inflation becomes embedded – rather than being consistent with its central forecast. This suggests a higher peak for Bank Rate than we’d anticipated.
• We now see the policy rate rising to 2.5% in November, with risks skewed to the upside. But we expect 75bps of rate cuts in 2023 as it becomes clear the MPC has gone too far.
• The BoE announced that active gilt sales are likely to commence after the September meeting, with £80bn of gilt redemptions and sales likely over the first year. We expect the macroeconomic implications of gilt sales to be modest.