BoE 'finally joins' hiking club but market pricing for further hikes 'too aggressive'

The Bank of England has finally joined the hiking club, and it sent a clear message that it isn’t done yet. We had expected a couple of dissents in favour of no change, so the unanimous decision to hike is hawkish, and the news that Mann wanted a jumbo 50 basis point rise is an even greater surprise. The debate no longer seems to be about whether to raise rates, but how quickly and how far they go.

As we expected, the guidance was open-ended. Bailey warned that today’s hike was unlikely to be the last so long as the Iran war drags on, but also said it shouldn’t be the start of a long sequence of hikes. Greene, Lombardelli and Pill all flagged further tightening and, with inflation seen peaking at an eye-watering 5% in 2027, another rate rise in February seems a pretty safe bet unless we get some good news on Iran soon.

Market pricing still looks too aggressive to us. The bank sees limited evidence of second-round effects and with unemployment still elevated and gilt yields high, the 75 basis points of further tightening priced in by late 2027 seems hard to justify.

Sterling has traded in a remarkably orderly fashion, which we think reflects how hawkish expectations already were going into the meeting. February is the easy call, but everything after that depends on Iran.