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.

– Advertisement –

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.

– Advertisement –

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.

– Advertisement –

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.”

Pound GBPUSD,
-0.10%
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.”

See also  Iran Begins Central Bank Digital Currency ‘Crypto Rial’ Pilot Today

Yield on 2 Year Gilt TMBMKGB-02Y,
3.506%
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.