Hawkish MPC signals aggressive pace of rate hikes in the UK

Alongside its decision to raise rates by 25bps to 0.5%, the MPC today sent an unmistakeably hawkish message, and we now expect further 25bp hikes in March and May, followed by another 25bp increase in H2. But in our view, the MPC’s aggressive approach is not consistent with the data nor with the sizeable downside risks to growth.

What you will learn:

• The BoE also signalled the start of quantitative tightening – we expect the BoE to be selling both gilts and corporate bonds by mid-2022. However, the macroeconomic impact of asset sales should be limited.
• As well as signalling a faster pace of near-term rate hikes, the MPC also began the process of quantitative tightening. £27.9bn of gilts held by the BoE are due to mature on March 7, and the proceeds will not be reinvested.
• As we argued in a recent Research Briefing, the macroeconomic impact of gilt sales should be small, provided that markets continue to function normally and investors have a good idea about the future path of interest rates.