The Bank of England on Thursday raised interest rates by 25 bps to 1.0%. Six of the bank's nine rate-setters supported the 25 bps hike, though three wanted a larger 50 bps move. The rate hike was in line with expectations, but the vote split was more hawkish than expected, with a Reuters poll showing that eight had been expected to support a 25 bps hike and one support no hike. 

The BoE said that most of its Monetary Policy Committee (MPC) members think that "some degree of further tightening in monetary policy may still be appropriate in the coming months". However, two of its MPC members thought that this rate guidance was inappropriate given risks to growth. 

According to the BoE's new Monetary Policy Report (MPR), inflation is seen peaking at an average of slightly above 10% in Q4 2022, an upwards revision from the March forecast for inflation to peak at around 8.0%. 

Additional Takeaways:

BoE staff will work on an active bond sale strategy and will report back to the MPC by the August meeting, with the MPC to then decide on whether to start sales at a subsequent meeting. 

GDP growth to slow sharply over the next year and a half, due to a sharp rise in global energy and tradable goods prices.

BoE forecasts point to a sharp contraction of almost 1% QoQ in Q4 2022 after energy prices rise again, followed by a small fall in GDP for 2023 and unemployment rising to 5.5% over the next 3 years. 

The BoE estimates GDP growth to be +0.9% QoQ in Q1 2022, a little higher than the March estimate of +0.75% QoQ, and sees around zero growth in Q2 2022 due to extra the public holiday and reduced Covid testing. 

The BoE forecast shows inflation in three years' time at 1.30%, lower than the February forecast of 1.60%, based on market interest rates. 

The BoE said UK inflation is likely to peak later, and fall back later, than in other countries due to the UK's energy price cap. 

Market rates imply more BoE tightening than back in February, showing the bank rate at 1.9% in Q4 2022, 2.6% in Q4 2023, 2.2% in Q4 2024, versus 1.2% in Q4 2022, 1.4% in Q4 2023, 1.3% in Q4 2024 back in February. 

The BoE forecast shows inflation in one year's time at 6.65%, higher than February's forecast of 5.21%, based on market interest rates and the modal forecast. 

The BoE forecast shows inflation in two years' time at 2.14%, similar to February's forecast of 2.15%, based on market interest rates. 

The BoE estimates real post-tax household disposable income falling -1.75% YoY in 2022, larger than the decline forecast in February of -1.25%, before then rising +1% in 2023 +2.5% in 2024. The 2022 decline will be the biggest annual drop since 2011. 

The BoE estimates wage growth will be +5.75% YoY in Q4 2022, above February's estimate of +3.75%, +4.75% in Q4 2023 and +2.75% in Q4 2024.

The BoE estimates GDP will grow +3.75% in 2022, in line with their February estimate, before declining 0.25% in 2023 and then rising 0.25% again in 2024.

The BoE estimates the unemployment rate will be 3.5% in Q4 2022, below the February forecast of 4.1%, before rising back to 4.25% in Q4 2023 and then to 5.0% in q4 2024. 

Market Reaction

GBP initially saw a kneejerk move higher, probably as a result of the hawkish vote split with three MPC members wanting a 50 bps hike, with GBP/USD momentarily surpassing 1.2575. The pair has since reversed sharply lower and is now trading in the 1.2450s, down about 1.3% on the day. 

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