Today’s announcement that the Bank of England (BoE) would raise its base interest rate from 0.5 to 0.75% came as little surprise to investment markets, which had almost fully priced in the move. The Bank’s committee members voted unanimously for the UK’s second rate rise since the financial crisis. The committee also agreed to maintain its current levels of corporate and government bond issuances at (£10bn and £435bn respectively), contrary to some earlier media speculation over the potential for quantitative tightening.
Given that the BoE did exactly as anticipated, and that Carney’s tone at the ensuing press conference was mildly hawkish, the only slight surprise has been the immediate market reaction – a fall in sterling and gilt yields. While the precise reasons for this response are as yet unclear, it seems that investors were given fresh insight into the BoE’s thought process, with Governor Carney referencing 2-3% as the bank’s estimated neutral rate (i.e. the rate neither accommodative nor restrictive to economic growth). The market’s reaction suggests that it may not entirely agree with these figures.
Perhaps this is unsurprising, given the lack of visibility ahead for the UK economy. The BoE has also just released its quarterly Inflation Report, in which it claims that CPI inflation is projected to decline towards its 2% target over the next three years. And while a downward trend is a point of general commonality across the BoE’s range of projections, the wide range of potential outcomes put forward (see chart below) means that there is little scope for certainty.
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