Bank of England raises rates but uncertainty remains after split vote

(Alliance News) - The Bank of England raised UK interest rates by 50 basis points on Thursday, as expected, but its outlook was more dovish than expected, giving investors much to think about before the new year.

The central bank raised rates to 3.50% from 3.0% previously. Market consensus, as cited by FXStreet, had expected this rise by Threadneedle street.

Six members backed the half a percent hike, while Swati Dhingra and Silvana Tenryro backed no change. Catherine Mann meanwhile favoured a larger 75 basis point hike. At its last meeting in November, the bank increased the bank rate by 0.75% to 3.0% by a majority of seven to two.

The difference in votes highlights the challenges facing the Bank of England as the new year approaches and points to the potential for a dovish pivot sooner than expected.

The monetary policy committee said that there are "considerable" uncertainties around the UK's outlook and confirmed that it will respond as "forcefully, as necessary". But given the uncertainty, analysts are divided as to what 'forcefully' really means.

ING's James Smith said that while the bank "warning that it could act 'forcefully' if required... curiously the meeting minutes suggest that a 50bp rate hike meets this definition. Not only does that suggest there’s a high bar for returning to 75bp rate hike increments, but at a stretch you could also say it lays the groundwork for a further slowdown in the pace of hikes to 25bp increments from the new year," he continued.

Smith however noted that "our best guess is the Committee implements another 50bp hike in February before calling it a day."

However, Berenberg's Kallum Pickering said: "The slower pace of tightening versus November, when policymakers hiked by 75bp, signals that a majority on the committee are growing confident that monetary policy is close to turning sufficiently tight to return inflation to the 2% target...Given the still-cautious tone over inflation risks, markets should be prepared for a further 25bp hike at the February meeting."

The uncertainty was unsurprising as the Monetary Policy Committee itself gave little away regarding what its next steps may be.

It said: "Should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate might be required for a sustainable return of inflation to target [of 2.0%]".

Economists at Pantheon Macroeconomics described this statement as "non-committal".

"This statement implies more than just a singular 25bp hike ahead, but 'might' is very wishy-washy compared to statements earlier this year, when the Committee said that further tightening was 'likely to be' appropriate," they said.

They also expect one further 50bp hike in February, but don't rule out two 25bps hikes.

While the bank was gave few clues about its course of action in its next meeting, it did offer some signals at where the peak for interest rates might sit.

As AJ Bell's Laith Khalaf pointed out: "It was notable that unlike last month, in its latest commentary the Bank didn't choose to take issue with market expectations for future interest rates, which suggests these are now more in tune with what policymakers are thinking, namely a peak of around 4.5% next summer. Clearly there are lots of factors which can move the interest rate peak up or down, but for now 4.5% looks a reasonable working assumption."

By Chris Dorrell, Alliance News reporter

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