As expected, the BoE increased interest rates by 25bps in a historic move. The committee vote for the rate increase by a 7-2 majority. The key driver for the increase in interest rates was the central bank’s more downbeat view on the economy’s growth potential, with the inflation forecast broadly unchanged from August.
With the slack in the economy now significantly reduced and sluggish business investment limiting the economy’s output potential, even a moderate rate of growth has the potential to generate core inflation in the medium and the long term. As previously communicated, the BoE expects further interest rate increases to occur at a gradual pace and to a limited extent.
Meanwhile overnight the Fed confirmed that its gradual policy continues to be its key focus. Given the recent uptick in the US economy and the low US unemployment rate, the market is completely pricing-in a December rate hike. Uncertainty, however remains over the path of US interest rates in 2018.
Shilen Shah is bond strategist at Investec Wealth & Investment