Bank of England raises interest rates by 50 basis points as economy slows

Bank of England raises interest rates by 50 basis points as economy slows

LONDON (Reuters) – The Bank of England raised its key interest rate to 2.25% from 1.75% on Thursday and said it would continue to “respond aggressively, as necessary” to inflation, despite the economy entering a recession.

The Bank of England’s move follows the US Federal Reserve’s decision on Wednesday to raise its key interest rate by three-quarters of a percentage point. Earlier on Thursday, the Swiss National Bank raised interest rates by 75 basis points.

Market reaction:

Forex: The pound is down more than half a cent against USD/GBP after the decision and slid below $1.13, after hitting a new 37-year low near $1.12 earlier in the day.

Bonds: British government bond prices fell sharply, driving up yields. Ten-year Treasury yields rose 9 basis points a day at 3.40%, their highest level since 2011.

Stocks: British bank shares fell before regaining some of their gains. It was last flat on the day, while the leading stock index was down just 0.4% on the day.

comments:

Viraj Patel, Global Macro Strategist, Vanda Research, London

“I think the decision makes sense because of what is likely to be announced tomorrow in the mini-budget. Effectively, the Truss government is expected to lower inflation expectations by announcing its policy tomorrow.

“The vote split is exceptional. You have nine people and there are three different outcomes. Five of them favored 50 basis points, 3 argued 75 basis points and one argued 25. This basically sums up the economic outlook for the UK. The right monetary policy is really, really tough.”

“For the Pound, I see what we announce tomorrow will be more optimistic from a growth perspective and lower inflation expectations in the short term. This may allow the BoE to stabilize further and may in fact be a good backdrop for the Pound.”

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ED HUTCHINGS, HEAD OF PRICES, AVIVA INVESTORS

“With margin financial markets expecting a 0.75% rise, the decision to do 0.50% but the start of quantitative tightening in October looks somewhat more of a balanced outcome for financial markets.

“However, given the backdrop of the financial tailwind, strong employment data and inflation that has not yet subsided, I expect both gold and sterling bond yields to remain somewhat unfavorable for the foreseeable future.”

Callum Pickering, Senior Economist, Berenberg

“The vote balance indicates that the stakes are likely to be at least toward maintaining this path for some time, and the outlook is uncertain given that members have such a scattering of views.

“Interestingly, the BoE is warning of potential inflation risks from Trussenomics, which is likely to point to a ‘higher for longer’ rates scenario.”

Chris Beauchamp, Head of Market Analyst, IG Group, London:

“The BoE doves have won for the time being, raising interest rates by only 50 basis points. But with inflation expectations already slightly lowered, perhaps there is ground for BoE tightening to ease back a bit.

“Once again, the Bank of England’s caution has hit sterling, which fell again after the decision. Perhaps the government’s statement tomorrow will give sterling traders something more positive to think about.”

Janet Moi, Head of Market Analysis, Brewin Dolphin

“The Bank of England raised rates by 50 basis points, and that has been fully priced in by the markets, and it contrasts with the 75 basis points increase announced by the Federal Reserve yesterday.

“For the Bank of England, the government’s energy support package reduces the immediate need to deliver a significant rate increase by ensuring that the peak and trajectory of inflation for next year is lower.

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“However, fiscal stimulus risks higher inflationary pressures in the medium term, so it will not change the position of the BoE to continue raising interest rates and maintaining financial conditions in a constrained region for the foreseeable future.

Sterling may face further weakness as the Bank of England refuses to join other major central banks to take bolder steps in raising interest rates as markets focus on the deteriorating financial situation in the UK.

HINESH PATEL, Portfolio Manager, Investors

“Markets were expecting a bigger rise of 0.75%, after the same increase yesterday by the Federal Reserve, which pushed the pound to its weakest level against the dollar since 1985. The Fed, with rates of 2.25% in the UK is lagging behind the 3-3.25% range in the states United.

“The Bank of England also missed an earlier opportunity, to say the least, to mitigate the impact on sterling. Instead, the Bank is now in a quandary over how to set policy rates with fiscal uncertainty and increased government borrowing. The Reganisk policies being introduced by the new government may It boosts growth, but in our opinion it will increase core inflationary pressures in the medium term.

“This comes at a time when the net supply of gold to the market is exacerbated by the acceleration of quantitative tightening. However, in the near term, money trends suggest that the inflationary pulse is in the rearview mirror. Combined with a blow to business confidence and consumer purchasing power this year, we expect that The bank is heading towards a rapidly deteriorating, but not catastrophic, environment.”

Chris Igo, Head of Core Investments, Investment Managers at AXA, London

“The announcements from the government this week will actually mean that we are getting a lower peak in inflation than would have been the case otherwise.

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“So if the Bank of England takes that into account, it’s a little optimistic that they didn’t do 75, they only did 50.”

Francis Hackey, Head of Economy Santander UK

“As expected, the Monetary Policy Committee (MPC) raised the bank interest rate to 2.25% at its meeting today. Given the disappointing July GDP data, retail sales growth is now declining, consumer confidence is at historic lows, and this It shows that families are already reducing spending to deal with the rising cost of living.

“Although inflation will continue to rise over the next month due to the slight increase in the energy price ceiling in October, the peak will be much lower than what the MPC forecast at its previous meeting.”

Heigh Jimber, Global Markets Strategist, JPMorgan Asset Management, London:

“I think (the split over the decision) highlights a panel that is unclear on the path ahead. It appears from the first summary survey that the committee has attached a great deal of importance to some of the weaker economic data we’ve had lately.

But the British economy needs a period of economic weakness to control inflation.

“I am quite surprised that the bank did not take this opportunity to go to 75 basis points, especially considering coverage from some other global central banks. The pound in particular here looks weak if the bank stays behind the curve.

“The British economy has one of the toughest combinations of growth and inflation in the G7. Until (investors) feel more comfortable that this mix of fiscal and monetary is an appropriate mix in the medium term, I expect the pound to continue depreciating against the dollar and the euro.” .

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