The importance of expectations

One key aspect is the consensus expectations prior to the MPC meeting. There was a widespread consensus view that the base rate would fall to 4.0%, so at a high level, the outcome simply met those expectations. However, there is a little more nuance involved in this case. There are nine voting members on the MPC and each one tends to have persistent tendencies in the weight of importance they place on various economic data, and consequently how they tend to vote. Members who tend to tilt towards higher rates are referred to as “hawkish” (possibly due to a greater focus on high inflation data), whilst conversely members who tend to tilt towards lower rates are referred to as “dovish”.

The expectation for today was that two of nine members would vote for no change, five of nine would vote for a 0.25% base rate cut, and the remaining two members would vote for a larger 0.5% cut. In reality, we saw four members vote for no cut, and only one vote for a larger 0.5% cut. At the same time, the Bank of England released new inflation forecasts, with upward revisions for the expected inflation rate for the next few years. The market’s interpretation of this outcome is that, overall, the committee is less inclined to deliver future cuts than had been previously assumed, which is a “hawkish” outcome versus those prior expectations. Hence the rally in Sterling and the sell-off in gilts as expectations of future interest rate levels are revised higher.