The pound fell 2 percent against the dollar, which had been boosted by a contrary signal from the Federal Reserve that U.S. interest rates will rise more than Wall Street expects. Warning that the outlook was “very challenging” and predicting a long recession ahead, the UK central bank gave unusually strong guidance that interest rates would not need to rise much further to bring inflation back to its 2% target. “We can’t make any promises about future interest rates,” BoE governor Andrew Bailey said. “But based on where we are today, we’re thinking [rates] it should rise less than it is today in the financial markets. This is important because, for example, it means that interest rates on new fixed-term mortgages should not rise as they have.’ He added that the Monetary Policy Committee for setting the Bank’s interest rates “will not seek a [interest rate] path that will drive inflation steadily below the target”. The BoE’s move matches the Fed’s 0.75 percentage point hike on Wednesday and the same increase by the European Central Bank last week. The rise in interest rates to 3 percent took the UK’s official interest rate to its highest level since late 2008. It is the biggest increase since 1989, apart from the quick reversal on September 16, 1992, known as Black Wednesday. Seven of the nine MPC members voted in favor of a three-quarters increase, saying in minutes that “a larger increase” at the meeting “would help bring inflation back to the 2 percent target over the medium term and reduce the risks of a more extended and costly tightening later.” However, their guidance and economic forecasts published by the BoE suggested a rosy outlook for UK interest rates. The CoE presented two possible scenarios. In one, interest rates will rise to 5.25 percent, leading to eight quarters of contraction – the biggest recession since the second world war – and inflation falling to zero in three years. But in a strong signal that it believes it may have already done most of the work needed to curb inflation, the central bank highlighted an alternative scenario in which interest rates would not rise further from the current 3%. In this scenario, inflation is projected to peak at 10.9 percent in the fourth quarter of 2022 before falling to 5.6 percent at the end of 2023, to 2.2 percent at the end of 2024 and below its target 2 percent in 2025. But even if interest rates remain on hold at 3%, the BoE is still forecasting a recession for five quarters, based on higher energy prices and mortgage costs. The BoE said the majority of the MPC believed that “further hikes” might be required for inflation to return firmly to target, but stressed that the market’s recent pricing of peak rates was too high. When the BoE closed its forecasts ahead of the meeting, investors were betting that interest rates would rise above 5.25%. Markets currently expect rates to peak at 4.65% in September next year. The BoE estimates that 2 million mortgages will reach the end of their fixed term by the end of next year, with those with an average mortgage of £130,000 having to pay £3,000 more a year to service their debts. In a separate message, the Bank said its forecasts were based on government policy on 17 October. They therefore do not take into account Prime Minister Rishi Sunak’s plans, due to be announced later this month, to save £50bn. would put further downward pressure on inflation. The MPC said it would “take into account any additional information in the government’s autumn statement at its meeting in December and in its next forecast in February”. Two MPC members dissented from the vote to raise rates by 0.75 percentage points. Swati Dhingra voted for a 0.5 percentage point hike, while Silvana Tenreiro voted for a 0.25 percentage point hike.
