The Bank of England’s Monetary Policy Committee today raised Bank Rate by +50bp to 3.5%, as they continue the fight against inflation, Ross Barr, Senior Investment Strategist, Cardano, comments:

“In contrast to the Bank’s September and November announcements (both mired by uncertainties over the trajectory of fiscal policy) today’s meeting has enabled the MPC to concentrate on their core aim of addressing UK inflation. The most recent data releases have been a little helpful, with headline CPI rising by +10.7% in the 12 months to November, down a fraction on the +11.1% rise registered in October.

“A rise of +50bp shows that the Bank is able to point to recent data as evidence that their policy stance is working and that a deceleration in the pace of tightening is an acceptable risk to the medium term outlook. Of course, the Bank is being assisted by the international energy pricing environment, and signs that inflation is easing in the US. The more acute nature of UK inflation means underperformance of gilts relative to other bond markets seems likely in our view.

“It is premature to assume that this week’s inflation data will herald further sharp falls. We know that there has been some disruption to seasonal adjustments in UK data during the Autumn due to the public holiday count in September. Also, both labour market and GDP data released this week suggest that inflation is likely to be stickier despite the forthcoming recession as certain areas of the economy remain robust.

“The Bank remains in the difficult position of delivering large rate hikes into a recessionary economy. Markets are pricing in a terminal rate of 4.30% by the end of next year. This is a fair assumption but there remains a hawkish risk to these estimates, especially as the government’s energy price guarantee programme will end on Q2 2023 – leaving CPI vulnerable to commodity price fluctuations in H2 2023. The split in the MPC – with 2 members voting to keep rates on hold – risks the interpretation by the market that the BoE may tolerate high inflation in the medium term especially as the recession is expected to be mild.

“In the weeks ahead, guidance as to where the MPC see the terminal rate for this hiking cycle settling are going to be welcomed by pension scheme investors in the UK who have had a turbulent ride over the past quarter. Now that the fiscal landscape is a little clearer, Governor Bailey should be able to more forcefully validate market expectations.”