But in an usually blunt comment on investors’ outlook for future hikes, it stressed the peak in rates will be “lower than priced into financial markets.”
Staying on the market path used in the forecasts, which peaks at around 5.25% next year, would knock 3% off GDP and ultimately push inflation to zero, the BOE said. An outlook based on rates staying at their current 3% level implies a shorter, shallower recession and sees inflation fall close to target in two years’ time.
“We think bank rate will have to go up less than what’s currently priced into financial markets,” BOE Governor Andrew Bailey said at a press conference. “That is important because, for instance, it means that the rates of new fixed-term mortgages should not need to rise as they have done.”
The remarks mark a sharp contrast with Federal Reserve Chair Jerome Powell, who said Wednesday that US rates will probably go higher than people are thinking. UK government bonds and the pound fell after the BOE’s decision. Investors had already tempered their view for UK rates, suggesting a peak around 4.75%.
The Bank of England has no choice than to attempt a lengthier glide path to bring inflation down because of the unique attributes of the UK economy. 2 million mortgage fixes roll over next year. That’s going to be a significant shock to the economy at current interest rates never mind if they are higher six months from now.Click HERE to subscribe to Fuller Treacy Money Back to top