The Bank of England base rate hits a 13-year high
SummaryOn 5 May, the Bank of England (BoE) voted six to three to raise the U.K. base rate by 0.25% to 1.0%. The last time the base rate was at this level was February 2009, when monetary policy was aggressively loosened to combat the effects of the Global Financial Crisis. The market reacted to the hike with a curve-wide rally in gilts, the 10-year gilt yield trading down 10 bps 20 minutes after the announcement, with the 2-year gilt down 14 bps. After the announcement, the BoE confirmed that the central bank would consider actively reducing their balance sheet in line with prior guidance of a 1.0% base rate threshold for active quantitative tightening. They also continued Governor Andrew Bailey’s previously “dovish” rhetoric by reasserting that “policy makers are treading a very tight line between tackling inflation and avoiding a recession”.
- The Bank of England raised the base rate by 0.25% to 1.0%.
- The 10-year gilt yield traded at 1.86%, down 0.1%, post announcement, with the 2-year gilt yield trading at 1.48%, down 0.14%.
- The market is currently pricing in a 100% likelihood of a further 25 bps hike in each of the next two meetings, with 125 bps of hikes expected by year-end.
- The vote was split six to three in favor of a 0.25% hike, with all three dissenters voting for a 0.5% increase.
- The Bank of England is set to become the first major central bank to begin active quantitative tightening.
- Bank of England rhetoric continued to show a dovish tilt, referencing increased recession risk.
The fourth consecutive rate hike comes amid a backdrop record breaking inflation that is being exacerbated by the Russia-Ukraine war and fresh lockdowns across China. Governor Bailey noted in his interview that Monetary Policy Committee (MPC) member opinions were diverging over the balancing act of controlling inflation and preventing a recession. Most notable in March’s meeting, the sole dissenter of a 0.25% rate hike, Sir Jon Cunliffe, voted for no change at all. Today, all three dissenters favoured a more aggressive 0.5% hike from a higher base — expressing concerns around the high speed of U.K. wage growth.
The statement yesterday confirmed that, as well as raising the base rate, the Bank of England will ask its analysts to consider actively selling gilts from its balance sheet, which is a step up from the passive strategy of the natural roll off. It is unlikely that a final decision will be made before August, with September the earliest we could expect to see active quantitative tightening.
Yesterday's decision comes on the 25th anniversary of the Bank of England’s independence from the U.K. government, and Governor Bailey described the current outlook as “the toughest challenge policy makers have faced,” since such authority was gained. While the central bank is forecasting that the U.K. will narrowly miss a technical recession this year, it said output will fall by 1.0% in the fourth quarter of this year and expects GDP to shrink by 0.25% across 2023. The outlook is clouded further by forecasts for inflation to exceed 10% by October. The BoE added that the Russia-Ukraine war is “the latest in a succession of very large shocks”.
The BoE forward guidance is at odds with the market’s expectation of future interest rates between now and the end of 2022. Whilst the central bank acknowledged that “further rises in its key rate may still be appropriate in coming months,” it included those two of the nine voting members “didn’t support that guidance and instead thought it likely that the key rate would stay at 1.0%”. The official guidance on further rates moves was adjusted to say, “most members judged that some degree of further tightening in monetary policy might still be appropriate in coming months.” The Federal Reserve's 0.5% rate hike yesterday, and insistence that it will continue at such a pace, may add pressure to the Bank of England to react in defense of the GBP currency to limit further import led inflation.
The mix of double-digit inflation and a predicted recession on the horizon makes MPC's job extremely challenging. The next meeting is not until 16 June, by which time the cost of living crisis and recent tax hikes will really be biting. The volatility of 2022 looks set to continue through the summer months.
To follow the developments of the market’s expectations of the forward interest rates visit Chatham Rates or contact us using the form below.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.22-0128
Our featured insights
ECB hikes 25 bps while BoE keeps rates steady
The Bank of England (BoE) announced it would keep rates on hold at today's meeting, following 14 consecutive rate hikes that have taken borrowing costs to 5.25%, the highest level since 2007. A 25-basis-point rate hike was expected at the start of the week, but the release of August inflation...
BoE hikes 25 bps and warns more to come, while ECB cools on a September hike
The Bank of England (BoE) raised borrowing costs by 25 basis points at their meeting today, a smaller hike than their June meeting following better-than-expected data. However, two policymakers voted for a 50-basis-point increase. The BoE's statement warned that some of the upside inflation risks...
FOMC increases rates by 25 bps to 525–550 bps range, reflecting 22-year high
On Wednesday, July 26, 2023, the Federal Open Market Committee (FOMC) voted unanimously to raise the fed funds rate to a target range of 5.25%–5.50%. Following a pause in rate hikes at the prior meeting, this increase elevates the fed funds target to its highest level since 2001 and was...
ECB holds course but BoE in trouble
The European Central Bank (ECB) continued its path of rate rises at the latest meeting, surprising no one with a hike of 25 basis points taking its deposit rate to 3.50%, the highest level in 22 years. The Governing Council is making every effort to reduce inflation to their 2.00% target after...
Fed holds rates: Powell pauses
On Wednesday, June 14, 2023, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 5.00% - 5.25%. The FOMC statement continued to reference economic expansion and a robust labor market. In a departure from the last statement, the FOMC cited...
No surprises as inflation persists
The European Central Bank (ECB) increased its main deposit rate by 25 basis points to 3.25%, but signaled that it would slow down the pace of its monetary policy tightening in light of weak economic growth and banks tightening credit access. The Bank of England (BoE) similarly increased its base...
Fed hikes 25 bps, signals possible rate pauses
On Wednesday, May 3, 2023, the Federal Open Market Committee (FOMC) voted unanimously to raise the fed funds rate by 25 basis points to a target range of 5.00% - 5.25%. The FOMC noted that ongoing economic developments will determine if additional hikes are necessary.