Bank of England surprises with 50 basis point rate hike to combat persistent inflation

In a surprising move, the Bank of England raised interest rates by 50 basis points on Thursday, marking its 13th consecutive increase as policymakers tackle the challenge of enduringly high inflation.

In a surprising move, the Monetary Policy Committee voted 7-2 in favor of a half percentage point increase, defying market expectations of a 25 basis point hike. This decision elevated the bank’s base rate to 5%.

This surprising decision defied market projections, as around a 60% chance of a smaller hike had been priced in.

Following the announcement, the British pound weakened against the US dollar, and there was a slight retreat in the yields of UK government bonds (gilts). The yield on the 10-year gilt experienced a decrease of approximately 4 basis points, as yields and prices move inversely.

Newly released data on Wednesday revealed that the annual consumer price inflation in the UK remained at 8.7% in May, unchanged from the previous month. This solidified market expectations that the Monetary Policy Committee (MPC) would pursue an additional rate hike.

Additionally, economists have raised their predictions for further tightening of monetary policy in the future.

Of particular concern to the central bank, core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, reached 7.1% year-on-year in May. This figure represents an increase from 6.8% in April and marks the highest rate since March 1992.

In its summary on Thursday, the MPC stated, “Recent data has shown significant positive developments that suggest a greater durability in the inflation trend, accompanied by a tight labor market and sustained demand resilience.”

“The MPC will maintain close monitoring of signs of enduring inflationary pressures in the overall economy, which encompass labor market conditions, wage growth, and services price inflation. If evidence emerges of sustained pressures, additional tightening of monetary policy would be necessary.”

Policymakers are delicately balancing the need to tighten monetary policy enough to address inflationary pressures while avoiding the risk of causing a severe mortgage crisis and recession.

According to the MPC, the substantial prevalence of fixed-rate mortgages implies that the complete effects of the recent bank rate increase “will take time to be fully realized.”

Starting from the end of 2021, the Bank of England has increased its main rate from 0.1% to 5%. Bank of England Governor Andrew Bailey stated in a Thursday statement, “While the economy is performing better than anticipated, the level of inflation remains too high and necessitates action.”

“We understand that this is a challenging decision, and it’s natural for individuals with mortgages or loans to feel concerned about the implications. However, if we postpone rate increases now, the potential consequences could be even more severe in the future.”

The recent larger rate increase, referred to as a “hawkish super-hike,” was partially anticipated by the market. However, the significant majority of votes in favor of the increase suggests a sense of urgency among MPC members.

Joseph Little, the global chief strategist at HSBC Asset Management, highlighted that this decisive move comes at a crucial point for the economy and reflects policymakers’ intention to be proactive.

Little noted that the UK faces a challenging situation among major Western economies, with a cost of living crisis exacerbated by rising energy and food prices, compounded by structural labor shortages that have resulted in increasing wages.



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By Ryan

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