11 Nov 2022 4 min read

Doving and diving: has the Bank of England made the pivot?


Hetal Mehta asks if the BoE will join the raft of central banks pivoting to a slower pace of hikes

Doving and diving has the Bank of England made the pivot.jpg


Last Thursday the Bank of England (BoE) increased interest rates by 75bps – its biggest hike for over 30 years. And yet the overall message was rather gloomy and dovish, with the BoE joining the raft of central banks making this pivot to a slower pace of hikes.

Why hike 75bps? Inflation is currently running at over 10% and is expected to stay at around this level for several more months (with the BoE seeing big upside risks over the next couple of years). Not only that, but the fallout from the mini-budget in September made it even more necessary for the BoE to display its inflation-fighting commitment in the face of the upward price pressures from fiscal easing.

But in the medium term, the Bank’s forecasts inflation  to fall sharply and to settle well below its 2% target. Part of this thanks to the assumption that energy prices will decline over time, while the other reason stems from the imminent recession that we expect to eventually exert disinflationary pressures.


BoE CPI modal inflation forecasts.png


The Recession is here

How bad is the growth outlook?

The BoE sees a deep, prolonged recession with barely any recovery until 2024-2025. That path is very similar to our forecasts for a 3% decline in the level of GDP, albeit for different reasons.  

We expect interest rates to peak at 4% early next year, while the BoE assumes a peak of 5¼%[1]. Meanwhile, the forecast in our November economic roadmap incorporates some further fiscal tightening we expect to be announced on 17th Nov, while the BoE only includes announcements up to Hunt’s policy reversals from 17 Oct. 


GDP forecasts compared.png


Fiscal picture: tax and not spend

That brings us on to the upcoming fiscal event.

The grim economic assessment of the BoE is likely to be shared by the Office for Budget Responsibility. And while the Chancellor already announced £32bn of fiscal tightening (i.e. policy reversals) last month, an estimated £50bn needs to be raised through spending cuts and tax increases to put the public finances back on an even keel (these days generally defined as getting debt-to-GDP falling in the medium term).

Where might the axe fall?

Given the cuts to public spending after the global financial crisis (e.g. the 25% cut to investment in real terms) and years of pre-pandemic spending restraint, I have long believed any material future fiscal tightening is more likely to focus on the tax side. But the 2019 manifesto pledged not to raise income tax, VAT or National Insurance – the biggest sources of tax revenue.

Either these promises need to be broken or steeper tax increases elsewhere need to be found. Another windfall tax on energy producers and fiscal drag through keeping tax bands frozen both seem highly likely though still not enough to get to £50bn. Then we’re back to some spending cuts after all – or at least pushing out pencilled-in increases (such as defence spending) into the latter part of the decade.

Whatever the precise nature of the tightening package, one thing we can be all but certain on is that the gloom won’t be lifting for some time.






[1] The BoE used market expectations of interest rates calculated over the final seven days of the 15-day period between 5 and 25 Oct.



LGIM contributors