Review hawkish surprise: 8-1 vote, Mann backed 50bp to 4.25%
- The BoE raised Bank Rate by 25bp to 4.00%. Vote split 8-1, with Mann preferring a 50bp hike—meaning all members supported tightening.
- Inflation is expected to reach around 5% by mid-2027. Despite limited evidence of second-round effects, the BoE sees enough price pressure to act.
- We change our call and add two further 25bp hikes in February and April, taking Bank Rate to 4.50%, unless a lasting resolution to the conflict is reached.
The Bank of England raised Bank Rate by 25bp to 4.00%, as expected. All members supported tightening, with Catherine Mann preferring a larger 50bp increase. However, the individual statements reveal different views on the path forward. Developments in the Middle East remain crucial, as a prolonged conflict would increase inflation risks. Some cost pressures are already in the pipeline but have yet to reach consumers. Evidence of second-round effects remains limited, but the MPC judges that firms' buffers, including energy hedges and lower profit margins, are largely temporary. The risk is that higher costs increasingly feed through to consumer prices as these buffers fade. The decision reflects both the scale and persistence of the energy shock and a more resilient economy.
The near-term inflation outlook has been revised materially higher. CPI inflation is projected to reach around 4.5% in Q1 2027, 1.25pp above the July forecast, and around 5% in Q2. The subsequent decline partly relies on lower energy prices implied by futures curves. Meanwhile, many measures of underlying inflation have stopped falling and remain somewhat above levels consistent with the 2% target, raising questions among some members about how restrictive policy has been. Bailey also left the door open to another hike unless inflation risks ease, before taking a more conditional approach to further tightening.
BoE call. We change our call and add two further 25bp hikes in February and April, taking Bank Rate to 4.50%. A more resilient economy and the growing risk of second-round effects from persistently high energy prices strengthen the case for further tightening. This rests on the assumption that no lasting resolution to the conflict is reached. The almost 70bp of tightening priced in by the market over the coming year seems excessive.
Market reaction. The hawkish surprise provided support for the GBP which strengthened modestly on the announcement, with GBP/USD rising to around 1.348 from 1.345 beforehand and EUR/GBP trading near 0.833. Two-year gilt yields traded higher.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
