The Bank of England (BoE) raised interest rates above expectations at its latest monetary policy meeting due to high inflation and salary growth.
The BoE raised rates to highest levels since 2008
The Monetary Policy Committee of the Bank of England (BoE) decided yesterday to increase interest rates to 5% from 4.5%, the highest level since 2008 and its largest rate increase since February. This comes after the most recent inflation data revealed an increase higher than estimates, as stated by the governor of the BoE, Andrew Bailey, who justified the rise in rates, above expectations, due to high inflation and high salary growth. Analysts estimate terminal interest rates at about 6% in response to the governor’s remarks.
After Wednesday's announcement of higher-than-anticipated inflation figures, the market was expecting a jump to 4.75%, however some experts saw a nearly 50% chance of an increase to 5%.
How did the British Pound react to interest rates being raised to 5%?
Following the announcement of the decision, the British Pound (GBP/USD) momentarily increased against the US Dollar, but quickly returned to its previous levels due to concerns that an overly strict monetary policy could plunge the UK economy into a prolonged recession. The yield curve for treasury bonds inverted further, indicating that investors believe there is a good chance the economy will experience a recession.
In terms of the major Western economies, the UK is in the worst position due to high inflation, labor shortage, and rising wages. This bleak picture put downward pressure on the British FTSE 100 stock index, which saw declines of about 1% during the day.
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With this move by the BoE, the main central banks of Western nations have confirmed a more restrictive attitude, with hikes also coming from the Central Bank of Switzerland and the European Central Bank.
Additionally, the door is still open for further rate increases in the US following remarks by the Federal Reserve chief Jerome Powell before the US Congress yesterday and the day before.
The consequence of this shift towards a tougher monetary policy is cutting into global economic growth forecasts, which have been reflected in the decline of stock markets after the rally of recent months.
GBP/USD monthly chart. Sources: Bloomberg, Reuters
Get even more value with the following articles:
- BoE raises rates to 5% from 4.5%
- Baily points to inflation being higher than estimated as justification for hike
- The Pound briefly rose against the Dollar but then fell back to previous levels
- The British FTSE 100 index fell close to 1%
- Tougher monetary policies from central banks have made global economic growth forecasts bleaker