Another interest rate hike from the Bank of England (BOE) was delivered at yesterday’s monetary policy announcement. For the second time in a row, the BOE thought it was necessary to tighten the monetary policy, mainly in light of rising inflation.
Yesterday’s headlines were dominated by the two main central banks in Europe announcing their monetary policies. The first one on the day was the BOE – it announced another rate hike, just like the market expected.
What the market did not expect was the rhetoric that followed. The BOE was nothing short of hawkish and did not intend to hide its intentions of tightening the monetary policy even more.
Here are the key takeaways after the BOE hiked the rates again:
- Dissenters wanted a bigger hike
- Inflation to exceed 7%, well above the BOE’s target
- GDP forecast was slashed
Interest rates reach 0.5%, but dissenters wanted more
The BOE is one of the first major central banks that started tightening its financial conditions. When compared to the Fed or the European Central Bank, the interest rate in the UK is much higher, now at 0.5%.
But the vote to increase the interest rates to 0.5% was a tight one. Four out of nine voters dissented wanted a 50 basis points increase. Hence, if anything, the current standing in the Monetary Policy Committee is truly hawkish.
Inflation to exceed 7%
Another interesting outcome of yesterday’s decision is the BOE’s view regarding inflation. It sees inflation peaking at a little above 7% this spring – well over its 2% definition of price stability.
Hence, raising the interest rates more aggressively makes sense, as higher rates typically act as cooling down inflation. But there is something else worth mentioning here: the previous BOE’s forecasts regarding inflation – most of them were basically wrong.
Therefore, the big question moving forward would be how high inflation would go and how fast the BOE will react to it?
BOE slashed the UK GDP forecast
Finally, the BOE lowered its 2022 GDP forecast to 3.75%. It makes the entire economic picture even more challenging, as the central bank is now seen as tightening in a slowing economy.
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