Bank of England: A surprise end to UK rate hikes?

Executive summary:

  • BoE shocks markets by holding off on a rate increase
  • We believe it is likely we have seen the last rate hike of the cycle
  • It is now even more important for Defined Benefit pension schemes to have a clear liability hedging policy in place

Today, in a shock decision, the Bank of England (BoE) left its policy rate at 5.25% by the tightest possible majority vote of 5-4. All but one of 65 economists polled by Reuters had predicted that the BoE would raise the rate to 5.5%.

The likely reason for this unexpected decision was the downward surprise on inflation. Yesterday, good news emerged in the latest inflation report, showing that the UK’s inflation rate eased in August, defying expectations of a further rise.

The consumer prices index (CPI) measure of inflation fell to 6.7% year-on-year, down from 6.8% in July and lower than the consensus forecast of 7.0%. The core CPI, which strips out volatile items such as food and energy, dropped to 6.2% from 6.9%, significantly below the 6.8% predicted by economists.

We believe this will be met by relief in the halls of the Old Lady. Despite the risk of a sharper economic slowdown, the Monetary Policy Committee (MPC) members are very mindful of their own credibility, which has suffered from the surge in inflation starting in mid-2021 to a peak of 11.1%.