Bank of England raises interest rate by 75 basis points, biggest hike in 33 years

LONDON — The Bank of England raised interest rates by 75 basis points on Thursday, its biggest hike since 1989, but struck a dovish tone as policymakers sought to temper market expectations for further aggressive tightening monetary policy.

The 75 basis point increase takes the Bank Rate to 3%, its eighth straight hike in the main policy rate, after the Monetary Policy Committee voted 7-2 in favor. One member voted for an increase of 0.5 percentage points while another preferred an increase of 0.25.

“The majority of the Committee believes that, if the economy evolves broadly in line with the latest projections in the Monetary Policy Report, further increases in the Bank Rate may be necessary for a sustained return of inflation to target, although than at a lower peak than expected in financial markets,” the MPC said, offering unusually market-specific guidance.

The MPC noted that its updated growth and inflation projections point to a “very challenging” outlook for the UK economy as it seeks to bring inflation back towards its 2% target.

UK GDP is expected to decline by around 0.75% in the second half of 2022, reflecting pressure on real incomes from soaring energy and tradable goods prices.

Growth is expected to continue to decline through 2023 and the first half of 2024 as “high energy prices and tighter financial conditions weigh on spending,” the bank said.

Economists had anticipated a less hawkish tone from the central bank following the change in British government. New Prime Minister Rishi Sunak’s likely return to more conventional fiscal policy after his predecessor Liz Truss’ brief and chaotic tenure has calmed markets and meant that monetary and fiscal policies are no longer pulling in opposite directions.

However, inflation rose to 10.1% in September and is expected to reach 11% in the fourth quarter, the Bank said, while mortgage rates rose sharply on expectations of higher interest rates, which puts additional pressure on households.

“For the current November forecast, and in line with the government’s October 17 announcements, the MPC’s working assumption is that some fiscal support continues beyond the current six-month price guarantee period of (EPG), generating a stylized trajectory for household energy prices over the next two years,” the MPC said.

“Such support would mechanically limit further increases in the energy component of CPI inflation and reduce its volatility. non-energy goods and services.”

Sterling fell 1.5% against the dollar after the decision to trade around $1.122, while UK government bond yields rose.

After its emergency bond-buying intervention last month averted a possible collapse in the UK pension fund market, in light of the fall in government bond prices caused largely Per Truss’ fiscal policy announcements, the Bank of England relaunched its plan to start selling gilts (British sovereign bonds) – which began on Tuesday.

“Little choice” but to meet market expectations

All eyes will now be on Finance Minister Jeremy Hunt’s budget statement of November 17, in which the government will have to “strike the right balance between supporting the economy and a credible medium-term plan for debt consolidation. “, according to Hugh Gimber, Global Head. market strategist at JPMorgan Asset Management.

Gimber suggested the Bank had “little choice” but to meet market expectations of a 75 basis point hike on Thursday.

“Such a large rise may seem unwarranted given the signs that activity in the UK is already contracting, but there is still little evidence that the slowdown is enough to bring inflation under control,” Gimber said.

“Vacancies continue to outstrip the number of people looking for work and wage growth at 6% is well above the level that would be consistent with the Bank’s inflation target.”

However, he also suggested that a more modest rise amid double-digit inflation, and following aggressive action by the US Federal Reserve and European Central Bank, would have risked “reigniting questions on the Bank’s credibility and increased volatility in sterling markets”. .”

The Fed on Wednesday approved a fourth consecutive three-quarter point hike, bringing its short-term borrowing grid to a target range of 3.75% to 4%, its highest level since January 2008.

The ECB also implemented a 75 basis point hike last week, taking its main benchmark to 1.5%, a level not seen since 2009.