Yesterday the bank of England enacted a 50-basis point rise in interest rates to 1.75% for the UK base rate, the highest rise for a number of years.

A 50-basis point rise was forecast by markets, but does highlight the shift in policy from the Bank of England. Even though the Bank of England was early in raising rates compared to the US and Europe, they have now had to change policy from implementing 25 basis points to 50 basis points to fight higher inflation.

What is even more compelling are the forecasts provided by the Bank’s governor Andrew Bailey. Whilst his predecessor, Mark Carney, was termed the ‘unreliable boyfriend’ for not giving the markets enough information, Governor Bailey has done the complete opposite and put all of the Bank of England’s cards on the table. The key points presented at the press conference were the following:

• Inflation will rise to over 13% in the final quarter of the year where it will peak and then start to fall.
• Growth in 2023 will fall to a low of -1.4% meaning a recession will occur which will last over 12 months.
• Fighting inflation is now the sole focus of the bank. The notable shift in tone, from walking a tight line of bringing down inflation and avoiding a recession, to full targeting of inflation, has occurred.
• The labour market will continue to be tight, and wages will rise.
• Businesses will continue to pass on cost rises to customers
• A vote will be taken in September to start quantitative tightening of the bank’s Gilt holdings to reduce its balance sheet faster

Eagled eyed investors like ourselves also noted how even though the very hawkish rhetoric above showed a shift in policy, there were some very dovish long-term forecasts within the data released as well.

Inflation is forecast to fall to 2% by 2024 and then less than 1% by the middle of 2025 due to the recession that the bank of England has forecast for next year. This forecast is based on the interest rate forwards which are currently pricing rates to reach 3% in 2023 before falling back to 2.2% by 2025.

It seems that the MPC were trying to provide different messages for different readers. A very hawkish message for the public and government who have been critical of the Bank of England moving too slowly and not keeping inflation under control, then a dovish message for economists who utilise the longer-term forecasts. The dovish nature of the forward pricing does show there is scope for the MPC not to hike rates as much as has been priced in as they are already signalling that current rates could be close to the level required to hit their long-term target of 2% inflation by 2025.

The question for investors now is how far will the Bank of England go? Data will drive the interest rate path going forwards but it seems there is room to move if needed. As with most central banks currently, will the most hawkish predictions come true? It is hard to know as the Central Banks do not seem to have all the answers themselves either, but markets seem to be pricing the worst of outcomes in already. This provides opportunity for longer term investors.