LONDON – The Bank of England raised interest rates half a percentage point higher than expected on Thursday, after saying there had been “significant” news suggesting Britain’s inflation would put more time to drop.
The BoE’s Monetary Policy Committee (MPC) voted 7-2 to raise its main interest rate to 5% from 4.5%, the highest since 2008 and its biggest rate increase since February, following a more sticky inflation and wage growth since policymakers last met in May.
“The economy is doing better than expected, but inflation is still too high and we have to deal with it,” BoE Governor Andrew Bailey said after the decision. “If we don’t raise rates now, it could be worse later,” he added.
Economists polled by Reuters had expected a move to 4.75%, although financial markets earlier on Thursday saw nearly a 50% chance of a rise to 5%, following stronger inflation data. higher than expected published on Wednesday.
The British pound briefly spiked against the US dollar while two-year bond yields briefly dipped below 5% following the BoE’s decision. An inversion of the yield curve from two years to 10 years, often a sign that investors expect a recession, has become more pronounced.
Joseph Little, chief global strategist at HSBC Asset Management, said Britain was in the worst position of major Western economies, hit not only by the cost of living crisis but also by a shortage of workers and jobs. rapidly rising wages.
“Inflationary pressures are showing more persistence and more momentum than other Western economies, and that’s forcing the Bank into a hawkish corner,” Little said.
“Today’s statement heightened concerns about a much higher policy rate, possibly as high as 6%.”
BoE policymakers had given little indication that a half-point rate hike was on the cards ahead of Thursday’s announcement.
“There has been significant upside news in recent data that points to greater persistence in the inflation process,” the MPC said. “Second-round effects in the evolution of domestic prices and wages generated by external cost shocks are likely to take longer to unwind than they appear.”
MPC members Silvana Tenreyro and Swati Dhingra opposed the rate hike – as they have done for everyone else this year – saying much of the impact of past tightening had not passed. not yet felt and that forward-looking indicators pointed to a sharp drop in inflation and wage growth. .
Britain’s high inflation rate is also a problem for Prime Minister Rishi Sunak, who has pledged to halve the pace of price growth this year in a bid to win back voter support ahead of the elections. national elections scheduled for 2024.
READ: UK set to have highest inflation among major economies in 2023-OECD
A spokesperson for Sunak said shortly before Thursday’s rate announcement that Sunak supported Bailey. Finance Minister Jeremy Hunt said the BoE had its full support and that “relentlessly fighting inflation must be the immediate priority.”
Bailey was criticized by some lawmakers from Sunak’s conservative party for not acting sooner and more aggressively on inflation.
Rising rate expectations
Expectations of BoE rate tightening have risen in recent days – sharply raising the cost of new mortgages – and ahead of Thursday’s decision, financial markets were expecting the BoE’s discount rate peak at 6% by the end of the year. By contrast, economists polled by Reuters last week saw a 5% spike.
Britain’s economy – which has been hit by the shock of Brexit as well as the COVID-19 pandemic and the spike in gas prices caused by Russia’s invasion of Ukraine – dodged a widely expected recession until present in 2023.
However, unlike most other major wealthy economies, output has barely recovered to pre-pandemic levels and growth this year is expected to be a minimum of 0.25%, according to the BoE’s forecast for the month. last.
The BoE’s rate hike follows the European Central Bank’s decision last week to hike rates by a quarter point to 3.5%, and rate hikes by the Swedish and Norwegian central banks more early Thursday.
As Britain faces a tricky inflation challenge, with inflation slow to fall from the 41-year high of 11.1% hit last year, other central banks also see challenges.
Bundesbank President Joachim Nagel called inflation a “very greedy beast” on Wednesday, and US Federal Reserve Chairman Jerome Powell said further rate hikes remained “a pretty good guess.” despite last week’s break.
The BoE retained its previous guidance on future policy that if there were to be any signs of more persistent pressures, further monetary policy tightening would be required.
The central bank also noted that yields on short-term UK government bonds had risen sharply – setting an average level of bank rate of 5.5% for the next three years.
The BoE said it would closely monitor the impact of rising rates on mortgage costs, as well as rising costs in the UK rental market.
Official figures on Wednesday show consumer price inflation remained unchanged at 8.7% in May and core inflation rose to its highest level since 1992.
Last month, the central bank forecast inflation would fall to just over 5% by the end of this year and be below its 2% target at the start of 2025.
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