As expected, the Bank of England just raised interest rates by 0.25% to 4.00%, which is the first hike since August 2023.
The decision was more hawkish than expected on the vote though, as all nine policymakers voted for a hike (one even for a larger 0.5% hike) rather than the two votes to hold that had been expected. The Bank now expects inflation to climb from 3.5% in September to nearly 5% by mid-2027 as rising global energy prices work their way through the economy. Although they stressed there is still limited evidence of significant second-round effects on wages (and other prices), they believe that inflationary pressures are building in the pipeline and, together with recent stronger economic data, this was enough to justify raising the rate.
The BoE was careful not to commit to a set path in rates, but the meeting minutes showed some members suggesting that more hikes were probably required. On the other side, some argued that hiking today was more of an insurance against potentially worse inflation outcomes and that the current monetary conditions are broadly appropriate. Overall, the message seems to be that policymakers are increasingly worried about energy-driven inflation becoming entrenched but that they want to keep their options open given the limited evidence so far of broader price pressures. Even so, market expectations for another rate hike in December have risen to around 50%.
Meanwhile across the pond, Democrats won control of both the House and the Senate in the midterm elections. This was the clean sweep scenario we flagged as the most likely and the initial reaction was in line with expectations. The USD softened, oil prices fell sharply and risk sentiment improved. However, analysts caution that the moves may partly reflect positioning rather than a longer-term shift, and the bigger drivers for the USD, such as the Fed’s rate path and the Iran war, are likely to remain in focus.
Sterling’s reaction to today’s meeting has been relatively muted, with GBP/USD trading close to the highest levels since mid-September. The GBP/EUR has increased slightly towards last week’s high (i.e. close to 17-mth highs). The EUR/USD has traded up to a 4-week high following the midterm election results. Next up we have important US jobs figures out tomorrow afternoon.