February 26, 2024

A passage near the Bank of England (BOE) in the City of London, Britain, Thursday, March 18, 2021.

Holly Adams | Bloomberg | Getty Images

LONDON – The Bank of England surprised markets on Thursday by raising interest rates by 50 basis points, the 13th straight hike as policymakers grapple with persistently high inflation.

Monetary Policy Committee votes 7-2 in favor of half point increase, which brings the bank’s base rate to 5%. The move defied market expectations, which had seen about a 60% chance of a 25 basis point hike.

GBP Sterling fell against the dollar on the news, while yields on UK government bonds, known as gilts, also eased slightly.this yield The 10-year note fell about 4 basis points. Yield is inversely related to price.

The latest data on Wednesday showed that UK annual consumer price inflation stood at 8.7% in May, unchanged from the previous month, reinforcing expectations that the Monetary Policy Committee will opt to raise rates again. Economists also raised expectations for further monetary tightening ahead.

Bank of England surprises with rate hike to 5%

Most worrying for the central bank, core inflation — which excludes volatile energy, food, alcohol and tobacco prices — was 7.1% year-on-year in May, up from 6.8% in April and the highest since March 1992 .

“Recent data have shown significant upside news, pointing to a more protracted inflation process against a backdrop of tight labor markets and continued resilience in demand,” the MPC said in a summary on Thursday.

“The MPC will continue to monitor closely for signs of persistent inflationary pressures across the economy, including tightness in labor market conditions and the performance of wage growth and service price inflation. Further tightening of monetary policy will be warranted if there is evidence of more persistent pressures. “

Policymakers are walking a tightrope trying to tighten monetary policy enough to calm inflationary pressures without triggering a full-blown mortgage crisis and recession.

The MPC said the high volume of fixed-rate mortgages meant that the full impact of the bank’s rate hikes to date “would not be felt for some time”.

Since the end of 2021, the bank has raised its key interest rate to 5% from 0.1%.

“The economy has performed better than expected, but inflation remains too high and we must grapple with that,” Bank of England Governor Andrew Bailey said in a statement on Thursday.

“We know it’s hard – many people with mortgages or loans are understandably concerned about what this means for them. But if we don’t raise rates now, it could be worse later.”

“Hawkish Super Hike”

While markets have partially priced in the sharp gains, some analysts said the majority signaled a sense of urgency among MPC members.

Joseph Little, global chief strategist at HSBC Asset Management, said the “hawkish super hike” came at a critical time for the economy and suggested policymakers wanted to “get ahead of the curve.” Front”.

“The UK finds itself in the worst position of any major western economy. A cost-of-living crisis fueled by rising energy and food prices, exacerbated by structural labor shortages, has now translated into rising wages,” Little said.

“Inflationary pressures appear to be more persistent and dynamic than in other western economies, forcing the central bank into a hawkish trap. Today’s statement adds to concerns about higher terminal policy rates, which could be as high as 6%. “

While all advanced economies have experienced similar post-pandemic inflationary pressures, UK headline inflation has decelerated much more slowly, while core inflation was significantly higher than all other G10 countries and accelerating.

Huw Davies, investment manager at Jupiter Asset Management, said the MPC’s move on Thursday was “a tacit admission that they were behind on rate hikes” and that the rate hike represented “an attempt to regain the initiative.” rights and reputation”. “

“The key issue is that UK real interest rates have been negative despite being in a tightening cycle. It feels like the BoE is going to have to inflict more pain on UK households to bring inflation back to a more contained level more in line with its inflation target,” Day said. Weiss said.