Key Takeaways
- In a surprise decision, the Bank of England increased Bank Rate by 50bps to 5%.
- We have increased our terminal rate forecast to 5.5% in light of the hawkish signal about the reaction function the decision provides.
- We remain sceptical that rates will follow the market curve, which sees Bank Rate climbing above 6%, given the risks of significantly overtightening policy.
- Most of the impact of past tightening has yet to be felt by the economy, with a large stock of mortgages set to roll on to much higher rates in coming months.
- The economy is heading for a recession. While a sustained period of economic weakness is unfortunately now required to sustainably bring inflation back to target, policy makers do not want to make the downturn any deeper than what is required to restore price stability.
- There is mounting pressure on the government to introduce substantial mortgage relief or ease fiscal policy more generally. This would make monetary policy less effective and exacerbate the UK’s inflation problems. Interest rates would need to stay higher for longer, making it the key risk to our forecasts given the political incentives facing the government.
Read the full article