If September’s fiscal uncertainty was centred around how loose government policy would become, November’s uncertainty is centred around how tight it is set to become. And, if September’s dilemma for the Bank of England was that they might not be doing enough tightening, November’s dilemma is that they end up doing too much. It seems therefore that the Monetary Policy Committee is still stumbling around in the dark.

The Bank has sought to navigate these tricky times by increasing Bank Rate to 3% albeit there were dissenting votes amongst the Monetary Policy Committee with 2 members preferring smaller increases. Notably the monetary policy statement indicates that the peak of this hiking cycle may not be as high as that which is currently priced into market expectations.

But we would be cautious in reading too much into this comment: while Bank of England projections are conditioned on market expectations of a 5.2% bank rate by Q2 2023, these expectations have since come down by 60bps to 4.6%. The tone of the monetary policy statement is more hawkish than before and the Bank expects to act “forcefully” should persistent inflation pressures continue. During the press conference, Monetary Policy Committee members reiterated that further rate rises will be necessary.

The UK’s inflation dynamics have clearly worsened since the last BoE meeting. When the central bank announced its decision on 22^nd September, it did not factor in the two-year Energy Price Guarantee that was formally announced a day after the meeting. Since then, the guarantee programme has been reduced to a six-month period and is now expected to expire on Q2 2023. In addition, other fiscal measures including NI tax cuts and stamp duty exemptions also support demand and spending. Unless we see a dramatic downshift in demand or continued decline in gas prices, it could be that risks to inflation continue to be to the upside.

There was no clear right or wrong direction for the Bank to take at today’s meeting. That will remain the case at least until the future path of fiscal policy crystallises, and its impact on the UK economy can be seen more clearly.

Yet even beyond that, the Bank of England is faced with the incredibly difficult balancing act of orchestrating large rate hikes in a recessionary economy. If the Bank of England fails to respond aggressively to bring down inflation expectations, Sterling might come under renewed pressure, which will in turn add to already significant inflationary pressures. The relatively open nature of the UK economy makes the transmission from a weaker currency to price pressures particularly swift and large, so Governor Andrew Bailey certainly has his work cut out.

A repeat of the heightened gilt market volatility of late-September/early-October seems less likely now given the hawkish tone of the government, but it cannot be ruled out. Pension schemes should ensure that the lessons learned from wargaming their cash waterfalls and liquidity profiles and, from working with their LDI managers during that period, remain front of mind.”