Bank of England raises interest rates to 0.25%

Monetary Policy Committee votes 8-1 in favour of rate hike

The Bank of England raised interest rates to 0.25% on Thursday, the first hike in over three years. 

The central bank’s Monetary Policy Committee (MPC) voted 8-1 in favour of the increase, a marked volte-face from its 7-2 vote against such measures in November. 

Inflation

The rapidly rising rate of inflation is thought to have been the driving factor behind the change in official thinking. 

Data published by the Office for National Statistics (ONS) on Wednesday revealed that the cost of living rose by the highest level in a decade in November. 

The official statistics body’s Consumer Price Index rose by 5.1% year-on-year, a marked increase from the 4.2% increase seen in October. Producer prices rose by 9.1% year-on-year, an increase from the 8.6% rise seen in the previous month. 

Indeed, anxiety this week, about runaway inflation far above the BoE’s 2% target, prompted the International Monetary Fund to urge the central bank to raise interest rates. 

Like many central banks in both Europe and North America, the Bank of England maintained throughout much of 2021 that high levels of inflation would prove to be ‘transitory’. In recent months it has conceded that the phenomenon will prove to be much more sustained than initially forecast. 

In its latest report, the MPC said that it expects “bank staff expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022, with that further increase accounted for predominantly by the lagged impact on utility bills of developments in wholesale gas prices”.

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Omicron

Despite hints from a number of MPC figures and the IMF’s recent exhortation, Thursday’s interest rate hike can be said to have taken markets by surprise. 

An increase in interest rates from their record lows was thought to have been complicated by the emergence of the Omicron variant of Covid-19. 

The Bank of England did revise down its expectations for fourth-quarter gross domestic product by 0.5% as a result of the new strain, which it argued “poses new risks to public health” due to being “much more transmissible than the Delta variant”.

Although it recognised that there was some value in waiting for further detail about the potential impact of Omicron, the Bank stated: “There was, however, also a strong case for tightening monetary policy now, given the strength of current underlying inflationary pressures and in order to maintain price stability in the medium term. The economic impact of the new variant could, in some scenarios, increase these inflationary pressures further”.

Market response

At 13:30 (GMT), sterling traded up by 0.8% and 0.7% against the dollar and yen, respectively, and by 0.3% against the euro at 1.1789. 

The FTSE 100 and 250 stood 0.9% and 1.3% higher at 7237.70 and 22735.75, respectively. 

The UK Gilt 10-Year Yield rose by eight basis points to 0.823%, a two-week high.

Further reading

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