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Berenberg: Expect 25bp Feb hike but March APF reinvestment to go ahead

BOE
  • “Although we had predicted beforehand that the BoE would go ahead today, Omicron had turned the decision into a very close call, in our view. Delaying the hike amid elevated uncertainty, as most pundits expected, would have been understandable. But it would not really have made sense. Inflation pressures are elevated and look set to remain so in the UK, partly due to pronounced labour shortages and the legacy of five years of underinvestment since the 2016 Brexit referendum. Rate increases affect aggregate nominal demand and hence inflation only with long and variable lags, often of four to six quarters. By the time today’s rate increase will have any noticeable impact on the inflation outlook, the potential near-term hit to economic activity from Omicron will almost certainly be history.”
  • “We expect a further 25bp hike in February 2022 to take the bank rate to 0.5%. Such a move would open the door for the BoE to begin its passive balance sheet unwind at the May MPC meeting. Our medium-term calls for the Bank rate remain unchanged. By end-2022, we expect the Bank rate to have risen to 0.75%, with 50bps of further hikes each year in 2023 and 2024. This would take the rate to 1.75% by end-2024.”
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