The Bank of England raised interest rates by 75 basis points, the largest rise in 33 years

LONDON – IN Bank of England It raised interest rates on Thursday by 75 basis points, its largest single increase since 1989, and warned of a prolonged recession as policymakers look to cool market expectations of more aggressive monetary policy.

The 75 basis point increase raises the bank rate to 3%, the eighth consecutive increase to the key lending rate, after the Monetary Policy Committee voted 7-2 in favour. One member voted for an increase of 0.5 percentage point while another member favored an increase of 0.25.

However, the bank appeared to be challenging market pricing for future interest rate hikes.

“The majority of the Committee is of the view that if the economy broadly develops in line with the latest Monetary Policy Report projections, further bank rate increases may be required in order to achieve a sustainable return of inflation to target, albeit to a lower peak than has been done. Pricing it in the financial markets,” said the MPC, which provides uncharacteristically specific guidance to the market.

The Monetary Policy Committee noted that its updated forecasts for growth and inflation indicate a “very tough” outlook for the UK economy as it looks to bring inflation back towards its 2% target.

UK GDP is expected to decline by about 0.75% during the second half of 2022, reflecting pressure on real incomes from higher energy and tradable prices.

The bank said the rise in market interest rates is conditional on the high trajectory of interest rates, and growth is expected to continue declining throughout 2023 and the first half of 2024, because “higher energy prices and tighter financial conditions affect spending.” Unemployment is expected to rise to 6.5% by 2025.

Economists expected a less hawkish tone From the central bank after the change in the UK government. New Prime Minister Rishi Sunak’s return to more conventional fiscal policy is likely after the short and chaotic stint of predecessor Liz Truss, calming markets and meaning monetary and fiscal policy can no longer run in opposite directions.

However, inflation rose to 10.1% in September and is expected to rise to 11% in the fourth quarter, the bank said, while mortgage rates rose sharply on the back of higher interest rate expectations, adding to the pressure on households.

“For the current forecast for November, and in line with the government’s October 17 announcements, the MPC’s working assumption is that some fiscal support continues beyond the current six-month period for the Energy Price Guarantee (EPG), generating a flowery trajectory for household energy prices. over the next two years.”

“Such support would mechanically limit further increases in the energy component of CPI inflation significantly, and reduce its volatility. However, in boosting aggregate private demand relative to the August forecast, the support could increase inflationary pressures in non-goods and services related to energy.”

Sterling pound It fell 2% against the dollar after the decision to trade around $1.116, while British government bond yields rose.

After her emergency bond-buying intervention last month that averted a possible collapse of the UK pension fund market, in light of a drop in government bond prices caused in a major party by Truss’ fiscal policy announcements, The Bank of England has revived its plan to start selling British sovereign bonds – which began on Tuesday.

‘Small choice’ but to meet market expectations

All eyes will now turn to Treasury Secretary Jeremy Hunt’s November 17 financial statement, in which the government will need to “strike a good balance between supporting the economy and a credible medium-term plan for debt consolidation,” according to Hugh Jimber, market strategist at JPMorgan Asset Management.

Jimber noted that the bank had “little choice” but to meet market expectations of a 75 basis point rise on Thursday.

“Such a spike may seem unwarranted in light of indications that UK activity is indeed shrinking, but there is little evidence so far that the slowdown is sufficient to tame inflation,” Jimber said.

“Vacancies continue to outpace the number of people looking for work and wage growth of 6% which is well above the level in line with the bank’s inflation target.”

However, it has also been suggested that there will be a more modest rise on the back of double-digit inflation, and after the aggressive measures of US Federal Reserve and the European Central BankIt could have risked “re-igniting questions about the bank’s credibility and further volatility in the sterling markets.”

The The Federal Reserve on Wednesday approved its fourth consecutive increase of three-quarters of a pointwhere the short-term borrowing rate rises to the target range of 3.75%-4%, the highest level since January 2008.

The The European Central Bank also raised 75 basis points last weekbringing its main index to 1.5%, a level not seen since 2009.