3.00pm: ECB in hawkish mood
Some reaction to the ECB's rate move, statement and press conference.
Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said “This is the most hawkish ECB press conference we’ve ever covered.”
He pointed out Christine Lagarde, the ECB president, made two significant comments beyond the already hawkish message sent by the initial statement.
First, she specified that the intention to keep raising rates at “a steady pace” implies 50bp hikes “for some time”.
Secondly, the explicitly noted that market expectations for the terminal rate have been too low.
“Just in case you weren’t listening on the cheap seats at the back; the ECB wants you to know that rates will increase higher and quicker than you expected” he exclaimed.
“We now see two 50bp rate hikes in Q1, 25bp more than before today’s meeting.”
“Looking further ahead, we now think the ECB will raise interest rates twice in Q2, by 25bp in April and June. This would put the terminal deposit rate at 3.5%, with the refinancing rate at 4.0%. That’s 75bp more than we thought before yesterday.”
1.20pm: ECB completes the set with 50bps increase
Over in Europe and the European Central Bank has completed the set and followed the Federal Reserve and Bank of England by lifting its three key interest rates by 50bps as well.
But it judged “that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.”
We raised interest rates by 0.50 percentage points.
See our latest monetary policy decisions https://t.co/3VdGkL3X2w pic.twitter.com/tTTfr0Poqd
— European Central Bank (@ecb) December 15, 2022
1.03pm: Reaction to the Bank’s rate decision:
The markets:
The FTSE 100 has taken the rate increase in its stride, little changed than before the announcement, down around 30 points at 7,466.
But the pound has weakened against the US dollar as investors noted some dovish moves by two MPC members and economists are now forecasting that rates may not increase as high as had been feared.
Sterling is down around 0.85% at US$1.231.
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Further market reaction can be found on the Proactive market report.
The politicians:
The chancellor Jeremy Hunt said: "High inflation, exacerbated by Putin's war in Ukraine, continues to plague countries across the world, eating into people's pay cheques and driving up food and energy prices.”
"I know this is tough for people right now, but it is vital that we stick to our plan, working in lockstep with the Bank of England as they take action to return inflation to target."
Shadow chancellor Rachel Reeves tweeted: “This is yet more evidence that the government have lost control of the economy, harming growth and leaving millions of working people paying a Tory mortgage penalty for years to come.”
Business:
Kitty Ussher, chief economist of the Institute of Directors, said: “From a business point of view, if higher interest rates are required now to stabilise prices in future, then the resulting 'necessary recession' should be as short and shallow as possible.”
“With the labour market starting to turn, the economy already contracting and base effects from last year's price rises expected to bring next year's headline inflation rate down automatically, it is important that the Bank does not tighten too far and risk prolonging the pain. We may soon be getting to the point where enough has been done” she suggested.
Federation of Small Businesses (FSB) National Chair Martin McTague said: “This time last year, the base rate was just 0.1%. The precipitous climb in borrowing costs in under 12 months has hit small firms hard, eroding their margins at a time when many are struggling with the very cost increases which prompted the Bank of England to increase the rate in the first place.”
The City:
Samuel Tombs, chief UK economist at Pantheon Macroeconomics said there were “no strong signals on the terminal rate, but the crumbling of hawkish dissent suggests we are close.”
He pointed out the minutes were “fairly light” on policy guidance but he highlighted the switch back of two members, Ramsden and Haskel, to the consensus vote, having sought 75bp hikes at recent meetings, “points to an emerging broad-based consensus that the terminal rate is approaching.”
“All told, we continue to think that the MPC will raise Bank Rate by 50bp to 4.0% at its next meeting in February, but then will stand pat in March and thereafter, as by the spring it should be clear in the GDP and core CPI data that it has done enough to return the headline rate of CPI inflation to the 2% target in 2024," Tombs said.
ING Economics said the release contained “some interestingly dovish signals.”
“Our best guess is the committee implements another 50bp hike in February before calling it a day. The hawks can continue to point to 6% wage growth and the fact that core services inflation is running higher than expected in November.
“But today’s meeting is a further demonstration of the delicate balancing act facing the BoE, between mitigating the risks of a tight jobs market on the one hand against mounting concerns about the housing market and the health of corporate borrowers on the other.
“We expect Bank Rate to peak at 4% in the new year, although we aren’t yet convinced a rate cut will be as quick to follow as in the US.” ING economists commented.
Fawad Razaqzada, market analyst at City Index and FOREX.com said: “What probably surprised investors is the split within the BoE. Two MPC officials, Tenreyro and Dhingra, voted to keep rates unchanged at 3% in a dovish move, while Mann voted for a bigger, 75 bps, hike. The other 6 agreed in line with market expectations to lift rates by 50bps.”
“Interestingly, the Bank has removed the wording that 'policy is not on a pre-set path' and the part on any changes to the 'scale, pace and timing' to interest rates will depend on the outlook. Perhaps, this is an indication that rate hikes will slow down moving forward," he added.
Edward Hutchings, head of rates at Aviva Investors noted: “With a 3-way split vote, it seems there is still much uncertainty amongst MPC members. However, the minutes state that the BoE do expect a recession for a ‘prolonged period’."
“After its recent bullish run, sterling strength could be somewhat more questionable from here and with further Quantitative Tightening to come plus a staggering amount of Gilt issuance, 2023 will continue to be volatile for the UK Gilt market” he suggested.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said: “It’s going to come as a horrible blow for borrowers who got used to rock bottom rates, and haven’t seen anything like this for 14 years.”
12.30pm: Inflation has peaked but wage growth remains a threat - BoE governor Bailey
In a letter to the chancellor, Jeremy Hunt, the Bank of England governor Andrew Bailey said “The MPC’s latest projections suggest that twelve-month CPI inflation has reached its peak” reflecting a fall in household energy prices.
But he cautioned: “Inflation is expected to remain very high in the next few months as global and domestic factors continue to push up on consumer price inflation.”
“CPI inflation is then expected to fall gradually into the spring of next year,” Bailey forecast.
Alongside the fall in energy prices, Bailey also noted “some non-energy commodity prices have fallen back from recent peaks, and there are signs that bottlenecks in global supply chains are starting to ease.”
Bailey also said that “the risks around that declining path for inflation were, however, judged to be to the upside” in part reflecting the possibility of more persistence in wage and price-setting as domestic wage and price pressures have strengthened and global inflationary pressures remain elevated.
He noted private sector regular wage growth has come in higher than expected and is likely to remain high at around 7% in the coming months while “a number of contacts of the Bank’s Agents expect further upward pressure on pay growth next year.”
He concluded: “The Committee will continue to act as necessary to ensure that CPI inflation returns to the 2% target sustainably in the medium term.”
12.15pm: Bank signals more rate rises to come
In its statement accompanying the rate increase, the Bank also signalled further rate hikes to come.
“The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target.
“There are considerable uncertainties around the outlook. The Committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary," it said.
On the bright side the Bank said it now expects the UK economy to perform better than previously forecast with a decline of 0.1% now seen in quarter four compared to previous expectations for a decline of 0.3%.
But it noted household consumption remains weak, most housing market indicators have continued to soften and surveys of investment intentions have also weakened further.
The Bank said CPI inflation is expected to continue to fall gradually over the first quarter of 2023, as earlier increases in energy and other goods prices drop out of the annual comparison but although labour demand has begun to ease, the labour market remains tight.
12.00pm: MPC votes 6-3 for 50bps rate rise
The Bank of England has raised interest rates by 50bps, as expected, taking the Bank Rate from 3.0% to 3.5%, the highest level since October 2008.
The move, the ninth in a row, is smaller than the 75bps increase in November as the central bank continues its fight to tame double-digit inflation.
At its meeting on Wednesday, 14 December 2022, the Monetary Policy Committee (MPC) voted by a majority of 6-3 for the increase.
The six members of the MPC who voted in favour of the 50bps rise were the governor, Andrew Bailey, plus Ben Broadbent, Jon Cunliffe, Jonathan Haskel, chief economist Huw Pill and Dave Ramsden,
But three members voted against. Two members – Swati Dhingra and Silvana Tenreyro – preferred to maintain the Bank Rate at 3.0% while Catherine L Mann preferred to increase it by 0.75 percentage points, to 3.75%.