Bank of England raises rates to contain inflation; book jumps

LONDON (Reuters) – The Bank of England raised interest rates to 0.5% on Thursday and nearly half of its policymakers wanted a bigger hike to contain endemic price pressures, as Britain’s central bank said warned that inflation would soon exceed 7%.

In a surprise split decision, four of the nine members of the Monetary Policy Committee wanted to raise interest rates by half a percentage point to 0.75% in what would have been the largest increase in borrowing costs since that the BoE became operationally independent 25 years ago.

MARKET REACTION:

The pound rose to its highest level in two years against the euro.

Yields on UK gilts rose after the BoE’s decision dragged eurozone bond yields with them.

UK stock markets continued to slide into negative territory following the news, with the blue-chip London FTSE 100 index losing 0.3% while the mid-cap index fell to -0.6% .

Here are some reactions from economists and analysts:

MARCUS WIDEN, ECONOMIST AT SEB:

“After today’s rate hike, we are likely entering a period of more regular rate hikes, but after today’s decision, we expect them to be even earlier. to less expansionary monetary policies, rate hikes are probably preferable to QT, for several reasons.

“Central banks, including the BoE, have much more experience with rate hikes, i.e. the transmission mechanism and the impact on private sector balance sheets and on overall financial conditions. There is also a lot of uncertainty about how shrinking balance sheets affect the real economy.From a communication point of view, rate hikes are also preferable because they allow the public to have a more clear of the central bank’s intentions.

KALLUM PICKERING, CHIEF ECONOMIST, BERENBERG:

“Gradual rate hikes plus a passive QT are a sensible response to rising inflation risks. While gilt markets may initially overreact to today’s policy decisions, causing benchmark rates to spike, The gradual normalization of interest rates that coincides with above-trend growth and strong nominal momentum should not pose a major risk to the recovery or the UK financial system.”

CAPITAL SAVING:

“The Bank appears more hawkish in three ways. First, the vote was 5-4 and the four minority members all wanted to raise rates to 0.75%. Second, not only did the Bank decide to start unwinding the QE in line with its previous forecast, but it announced it would sell its £20bn of corporate bonds This is a faster than expected balance sheet Third, the MPC revised its forecast upwards CPI inflation to peak at 7.25% in April and be well above the 2.0% target for all of 2022 and 2023.”

RICHARD MCGUIRE, HEAD OF PRICING STRATEGY AT RABOBANK

“We believe they are effectively breaking a supply-side nut with a demand-side hammer.”

“I think central banks still believe that these are supply pressures that we are under, but short-term inflation expectations have clearly increased significantly. They are increasingly concerned that these expectations will don’t affect the longer-term inflation outlook, so they’re making one or two policy mistakes: either they do nothing and wage growth picks up more and we get second-round effects… or they raise rates even though it’s not a demand issue and everyone feels poorer because of it.”

DEAN TURNER, ECONOMIST AT UBS GLOBAL WEALTH MANAGEMENT:

“In addition to the rate announcement, the Bank revealed that gilt reinvestments will stop and, in another unexpected move, the £20 billion corporate bond portfolio will be sold by the end A hawkish surprise, but the key question remains: Given their revised economic projections, which call for higher-than-expected short-term inflation, we still believe investors should prepare for at least minus two more hikes from the Bank this year.”

“The pound rallied after this afternoon’s news and is trading at a two-year high against the euro. In our view, a hawkish BoE will lead to further gains against the single currency in the Progress against the US dollar will be more difficult as the Federal Reserve is in an equally hawkish mood.

RICHARD FLAX, DIRECTOR OF INVESTMENTS AT DIGITAL WEALTH MANAGER MONEYFARM:

“The rate hike was largely in line with expectations, but the vote was 5 to 4 with a minority in favor of a 50 basis point hike, which sent a slightly more hawkish message. This, combined with a calendar of asset disposals, underscores that the MPC is keen to tackle stubbornly high inflation rates and normalize monetary policy.”

(Reporting by the EMEA Markets and Finance team; compiled by Saikat Chatterjee; editing by Bernadette Baum)

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