September 24, 2022

The Bank of England, in a controversial decision, decided to raise interest rates by half a point to the highest level since 2008, as the UK central bank joined peers around the world in trying to bring down inflation by reducing demand.

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The vote to bring rates down to 2.25% was 5-to-4, with three members calling for a 75-basis-point increase, while one voting for a quarter-point increase. This was the seventh consecutive increase for the UK central bank.

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The US Federal Reserve on Wednesday opted for a 75-basis-point hike, as did the Swiss National Bank earlier on Thursday, becoming the last European central bank to end negative interest rates. Norway’s Norges Bank raised rates by half a point, while the Bank of Japan did not change rates.

The Bank of England unanimously agreed to begin reducing the size of its balance sheet, with plans to reduce it by £80 billion over the next 12 months.

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According to the minutes of the meeting, the majority observed that “a tight labor market with wage growth and domestic inflation well above target-consistent rates justifies a further, forceful response from monetary policy.”

The decision staggered in the aftermath but was higher at $1.1298 versus $1.1271 that day.

“Reading the statement and the minutes it is quite remarkable how low the pound is,” said the ING economists. “Businesses are concerned that a weaker pound is adding to their input costs. But the bank had little to say beyond sterling that it had fallen 4.5% since the August meeting. The lack of comment may have attributed to sterling’s weakness. Reflects the real politics of linking to rising fiscal concerns in the UK.”

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Yield on 2 Year Gilt TMBMKGB-02Y,
rose 13 basis points to 3.49%.

The uncertainty around the outlook for UK energy prices has fallen after the central bank noted that the new Liz Truss-led government opted to guarantee domestic energy prices. The central bank said it would conduct a full assessment in November, as the government prepares to present its mini budget on Friday.

Three who wanted a 75-basis-point increase – Jonathan Haskell, Katherine Mann and Dave Ramsden – reported that energy guarantees would also add to demand pressure. Swati Dhingra, who wanted a growth of 25 basis points, said activity already appears to be weakening, and the risks of a second round of impact from inflation are falling.

The Bank of England said it expects inflation to be below 11% in October, compared to a rate of 9.9% in August.