Daniel Siluk (Janus Henderson) | The Bank of England delivered its first rate increase in more than three years, lifting Bank Rate by 25 basis points to 4%. While the move itself was widely anticipated, the 8–1 vote was more hawkish than expected, with the sole dissenter, Catherine Mann, arguing for a larger 50 basis point increase. The Bank also materially revised its inflation outlook, with CPI now expected to rise towards 5% by the middle of next year, as elevated energy prices continue to work their way through the economy. Recent resilience in economic activity has added to the case for some additional tightening, and Governor Andrew Bailey indicated that another increase could be warranted if inflation pressures do not ease.
However, we would be cautious about interpreting today’s decision as the beginning of a prolonged hiking cycle. The energy shock is lifting headline inflation, but there remains relatively limited evidence that it is becoming embedded in broader wages and prices. At the same time, higher energy bills, elevated mortgage rates and tighter financial conditions are increasingly weighing on household purchasing power and should ultimately slow demand. Andrew Bailey was careful to stress that today’s move should not be viewed as the first in a sequence of increases. Our view is that the Bank is effectively buying some insurance against second-round inflation effects and protecting its inflation-fighting credibility. One further increase looks increasingly plausible, but the bigger question for markets is whether the considerably longer tightening cycle currently reflected in the curve will ultimately be delivered. That leaves us relatively constructive on UK duration further out the curve, even if the near-term policy risks remain skewed towards additional tightening.
