Bank of England raises rates by 50 bps

Markets were set up for a more aggressive move and more united consensus among committee members

22 September 2022

The Bank of England (BoE) raised rates by 50 bps to 2.25% at its delayed meeting following the death of Her Majesty Queen Elizabeth II. Three of the committee members voted for a similar sized increase as the US Federal Reserve made yesterday of 75 bps, but they were drowned out by the consensus of five others voting for a 50 bps increase (and one member voting for just a 25 bps increase). Markets were set up for a more aggressive move and more united consensus among committee members, so sterling could likely suffer continued short term disappointment on the back of this more dovish (albeit split) hike. On the face of it, it’s an odd decision given the BoE’s inflation forecast has not materially altered – it still expects inflation to run exceptionally hot and to peak at 11%. Also, the gap between short dated gilt yields and base rates is becoming increasingly detached. Markets clearly expect more hikes to come - if anything we are currently only halfway there with terminal rates of closer to 5% priced in likelihood, but maybe the BoE knows more of the mini-budget pro-growth bazookas coming tomorrow from new Chancellor Kwasi Kwarteng.