Shock UK Rate Rise – read all about it 

The MPC raised rates by 25bps to 5.25% this morning.... this sends a strong signal and puts another dent in the MPC's claims that it likes to make policy "boring". Suddenly the MPC sounds as though they are behind the curve. Enraged economists, who had assumed that the MPC wouldn't raise rates at a meeting that didn't coincide with a formal inflation report, are up in arms that the MPC had the nerve to defy them!

The statement is pretty hawkish. The MPC sees rapid money growth, economic growth at a firm pace, capacity constraints (including in the labour market), and upside risks to inflation relative to the November inflation report. Of course, none of that explains why it chose to take the markets by surprise today rather than hiking in February, as a growing number of people had expected. One reason may be to ensure that wage pressures remain subdued in the pay round which kicks off this month, but there must also be a strong suspicion that December's CPI figures - which the Committee would have had today - played a part. They may well show inflation rising further, possibly even into letter-writing territory. As such, the MPC may have felt that a hike today will make a letter easier to write!

One further thought - they have chosen to raise rates despite noting that GBP has risen and oil fallen back, while basing hopes for moderating inflation on falling import prices and energy costs. What happens if oil rallies again and Sterling falls? More rate hikes?

Until recently a February hike was forecast to be the probable top of the UK interest rate cycle. Bottom line: Expectations that there will be another rise over the coming months will become the norm.

Prometheus from sources: ADM, Barclays Capital, Cazenove, Charles Stanley, HSBC, ING, SocGen, UBS.