0.75% increase, taking rates to 3%, biggest single increase since 1989. Inflation is expected to remain at around 11% in Q4, slightly lower than previously expected, before falling back in 2023. Treasury and Bank of England look increasingly joined up. Recent data suggests earlier rate rises are having an effect.
Nicholas Hyett, Investment Analyst, Wealth Club said: “The Bank of England has raised interest rates to 3%, a level not seen since 2008. This is the eighth increase in a row and the biggest single rate rise since the late 1980’s. The Bank’s inflation forecasts have also been announced which show that CPI is expected to remain high at around 11% in the near term before falling back next year, although it is expected to remain well above the Bank’s 2% target.
“The market reaction was unremarkable, given that the 75bps was already priced in and widely predicted.
“However, the overall economic picture is probably better now than it was a month ago after the mini-budget turbulence. The bank may well feel it can ease its foot off the gas going forwards – with rates rising slower and ending lower than we might have thought a few weeks ago. It’s too early to call time on rate rises, but increases could be slower from here – reflected in the fact that two members of the committee voted to raise rates by less than 0.75% this time round.
“It helps that the government and bank are now pulling in the right direction. The Bank raises rates to curb inflation, by discouraging people from spending money. Rishi Sunak’s plans to raise taxes and cut public spending have the same effect. The recent stability in sterling reduces the need to hike rates to defend the currency too.
“Recent macroeconomic data suggests previous rate rises are starting to have an effect. House price growth has slowed and perhaps even started to reverse. Consumer lending more broadly is also falling as the general public look to nurse wallets and purses over what is set to be a difficult winter.
“It’s far too early to call time on rate rises, but at least the two giants of British economic policy, the Bank of England and HM Treasury, no longer look like they’re squaring up for a bare knuckle boxing match. A joined up effort should calm market nerves and could help mitigate the long term pain.”