BoE signals 'insurance hike' in November – Sterling 'gets little help' from hawkishness

The Bank of England left rates unchanged at its September meeting, though its hawkish set of communications suggested that it was prepared to raise rates later in the year.

The vote was split 6-3, which disappointed some of the market that had been anticipating a 7-2 outcome. The MPC's inflation projections were revised upwards, and several members noted that they could soon pivot towards a hike should the energy shock persist, which the bank explicitly said was likely.

While we would argue that the domestic outlook, notably stable core inflation and a weakening jobs market, does not warrant higher rates, we now expect the bank to deliver an insurance hike at the November meeting.

Sterling got little help from this hawkishness and actually sold off following Thursday’s decision, which may partly be due to a classic case of “buy the rumour, sell the fact”, while most other G10 central banks are also pushing their expectations for policy rates higher.

The recent tone in economic releases from the UK has been generally positive, and we expect this week's PMI numbers to validate this optimism, but the relentless rise of gilt rates is starting to introduce downside risks to public budget execution.