BoE signals a February rate rise after unanimous hike

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 hawk Catherine Mann wanted a jumbo 50 basis point rise is an even greater surprise.

As we expected, the guidance was open-ended, though Bailey warned that the hike was unlikely to be the last so long as the Iran war drags on. The MPC also now sees headline inflation peaking at an eye-watering 5% in mid-2027, which supports yesterday’s decision to raise rates.

We now see it as a fairly safe bet that the MPC will raise rates in February, barring a swift resolution to the Iran war. Swap markets see a December hike as a coin-toss, though we do not believe that the data, nor the BoE’s communications, are consistent with such an outcome. The bank’s said on Thursday that this shouldn’t be the start of a long sequence of hikes, which we do not see as language that points to either a December move, or further hikes beyond February.

Market pricing in general still looks too aggressive to us.

The bank sees limited evidence of second-round effects and with unemployment elevated and gilt yields high the 70 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.