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Bank of England Rate Rise Uncertainty

The Bank of England is facing a difficult decision today.  Expectations are for a hike of 0.25 to 0.50.  Given the nature of the mortagage market in the UK where fixed rates beyond 5 years is not common, means that many homeowners will be facing a huge jump in mortage payments.  That is due to many homeowners having to refinance at a higher rate or on variable rates.

Thus, the BOE must consider how much risk consumers face based in their models.  At the same time, inflationationary preassures suggest a more aggressive stance.  This is a delicate moment for policymakers therefore how they communicate to the market will be vital.

Thus, we forcast two secenarios as highly possible.  First, they raise the rate by 0.25 with strong talk of further rate increases.  The second option is that after modeling the risk to the housing market, they feel that the risks of a 0.50 rate rise is a viable option.  The hope is that the 30 year high inflation rate will be brought under control.

If it does not happen now, then it will happen by August since a dovish member of the Monetary Policy Committe (MPC) is replaced by Megan Greene who is hawkish.   This means that the MPC  will have more hawkish members by August.  In short the BOE is behind the curve with inflation getting our of hand.  Whether it is 0.25 or 0.5 now, expect a more agressive policy this summer.

The policy goal is 6% as the terminal rate for the UK in order to tame inflation.

 

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