• Monday, July 22, 2024
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BusinessDay

BoE raises interest rate to 15-yr peak amid inflation battle

Will markets listen to hawkish talk from the Bank of England_

The Bank of England (BoE) on Thursday raised the key interest rate by 25 basis points, bringing it to 5.25 percent, making it the 14th consecutive increase since the bank started to raise interest rates.

This rate hike is the highest in 15 years and comes as the BoE confronts rising inflation. The central bank has also warned that borrowing costs are likely to remain high for a much longer period of time.

In contrast to the U.S. Federal Reserve and the European Central Bank, which recently signalled the end of their rate hikes, the BoE’s Monetary Policy Committee (MPC) gave no indication of an imminent pause.

The MPC has chosen to persist in its battle against high inflation as the global economic landscape continues to be fraught with uncertainties.

The BoE reaffirmed its commitment to bringing inflation back to its 2 percent target, stating, “The MPC will ensure that the Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2 percent target.” Governor Andrew Bailey said this during a press conference.

Despite the limited growth projected for the British economy in the coming years, Bailey remained resolute and cautioned against premature speculation about the timing of any rate cuts, stating, “I don’t think it is time to declare it’s all over.” He also acknowledged the possibility of future rate increases, though nothing was certain.

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High inflation has been a persistent concern for the UK, with figures reaching an alarming 41-year peak of 11.1 percent in October of the previous year.

Even though inflation has since decreased to 7.9 percent in June, it remains the highest among major economies worldwide. To curb this inflation surge, Deputy Governor Ben Broadbent stressed the importance of maintaining relatively high interest rates for an extended period.

Despite the BoE’s clear message, financial markets, according to Reuters, initially anticipated a more aggressive half-point rate increase to 5.5 percent.

However, investors reevaluated their expectations when the BoE referred to its policy stance as “restrictive” for the first time.

This change led to a slight reduction in the projected BoE tightening, with rates now expected to peak at 5.75 percent. Two-year bond yields also declined, although investors still saw a two-in-three chance of rates rising to 5.5 percent in the following month. The value of the pound sterling remained relatively stable on the day.

The BoE has come under criticism in the past for being seemingly unconcerned about inflation.

However, the bank now recognises the gravity of the situation, acknowledging that rising inflation poses a long-term challenge to the economy.

Governor Bailey highlighted the rapid pace of pay growth, which has exceeded the BoE’s previous forecasts and been a significant driver of high inflation, surpassing companies’ profit margins.

The Bank of England’s decision to raise its interest rate to a 15-year peak comes as it remains steadfast in its efforts to combat surging inflation.