Expectations at the last BoE meeting was for a 25bps rate hike. So, when the BoE hiked by 25bps to 0.50% it was not a surprise. However, what was a surprise was that 4 out of the 9 members voted for a 50bps rate hike. This was a bullish shift and shows the BoE’s concern about combating inflation. The BoE now sees inflation moving up in April to around 7.25% and wages are increasing which is a concern to the BoE. It is so much a concern that Bank of England’s Governor Bailey was even asking employees not to ask for pay rises.

QE coming to an end

In addition to the rate hike, the Committee agreed that the Bank of England should cease to reinvest any maturities falling due from its stock of sterling non-financial investment-grade corporate bond purchases and that it should initiate a programme of corporate bond sales to be completed no earlier than towards the end of 2023 that should unwind fully the stock of corporate bond purchases. So, QE reinvestments are coming to an end.

The dissenters: The 5-4 vote split

Ramsden, Saunders, Haskell, & Mann all voted for a bigger rate hike voting for a 50bps rate hike to 0.75%.

Inflation is seen to fall back in time

Transitory can mean different things to different people, but the BoE’s projections are for inflation to fall back in the medium term. Their projections are for:

  • 1 year’s time: 5.21%
  • 2 year’s time: 2.15%
  • 3 year’s time: 1.60%

However, inflation is the key concern for the BoE. After the rate statement, BoE’s Bailey stated that the Monetary Policy Committee (MPC) needs to focus on its inflation objective. Bailey made the point that he prefers smaller steps with rate increases because a larger step could send out the wrong signals about the pace of future moves. Bailey said it would not be surprising to see another rate increase, but warned ‘not to get carried away’. This point was echoed by Chief Economist Pill the day after Bailey spoke on Friday last week where he said that we should not ‘anticipate aggressive rate hikes in the medium term’.

The takeaway

The main point here is that the BoE is more concerned about inflationary pressures than it has been. This should be supportive of the GBP medium term. The main tool the BoE has to combat rising inflation is to hike interest rates. This should keep the GBPCHF pair bought on dips as long as risk does not run sour and bring bids into the CHF. The SNB have very low-interest rates at negative 0.75% One key risk to be aware is any Russian incursion of Ukraine as that would bring bids into the CHF and the JPY.