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Bank of England raises rates by 50 basis points, disappoints investors

Bank of England raises rates by 50 basis points, disappoints investors

by host

The Bank of England on Thursday raised its benchmark interest rates by 50 basis points to 2.25 percent, disappointing investors who had largely bet on an even more aggressive hike.

The Bank’s Monetary Policy Committee was split on the decision. According to the statement, “five members voted to raise [the] Bank Rate by 0.5 percentage points, three members preferred to increase [the] Bank Rate by 0.75 percentage points, to 2.5 percent, and one member preferred to increase [the] Bank Rate by 0.25 percentage points, to 2 percent.”

The BoE’s announcement follows on the heels of the third 75-basis-point hike by the U.S. Federal Reserve. The pound dropped 0.5 percent on the announcement but was still up on the day after it had risen on news that the Bank of Japan intervened in currency markets. Ahead of the announcement, the pound had fallen to levels not seen since 1985 — the year Mikhail Gorbachev became Soviet leader.

The BoE was the first major central bank to lift interest rates in this cycle, but others have more recently opted for bolder steps. Earlier in the day, the Swiss National Bank raised rates by 75 basis points, as did the European Central Bank earlier this month. The Swedish Riksbank surprised with a whopping full 1 percentage-point hike.

The Old Lady of Threadneedle Street pledged it “would take the actions necessary to return inflation to the 2%” and that should “the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee would respond forcefully, as necessary.”

Uncertainty surrounding the economic outlook in face of a new government stimulus program will have added to the conviction to move at a steady pace.

The new government plan under Prime Minister Liz Truss to cap household and business energy prices “is likely to limit significantly further increases in CPI inflation, and reduce its volatility, while supporting aggregate private demand relative to the Committee’s August projections.”

The BoE now expects inflation to peak at just under 11 percent, compared with just above 13 percent seen in August, but is still expected to post double digits for some months. At the same time, GDP is now expected to decline by 0.1 percent in the current quarter, compared with expectations of a modest 0.4 percent increase.

An additional growth plan by the government, yet to be announced, is expected to provide further fiscal support that will materially affect the economic outlook, the BoE’s statement said: “Once this announcement has been made, and as part of its November MPC round, the Committee will make a full assessment of the impact on demand and inflation from all these announcements, along with other news, and determine further implications for monetary policy.”

The committee also voted unanimously to reduce the stock of purchased U.K. government bonds, financed by the issuance of central bank reserves, by £80 billion over the next 12 months, to a total of £758 billion, in line with the strategy set out in the minutes of the August MPC meeting.

This article has been updated.

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