Bank of England raises Bank Rate to 15 year high; Market fluctuations remain rife as economists digest data
The Bank of England has raised UK interest rates to a 15-year high of 5%, as it continues a tough battle against inflation.
There are certainly household concerns that mortgage-holders face a timebomb of higher rates. Furthermore, the Bank’s monetary policy committee decided to raise its benchmark rates from 4.5% to 5%, an increase of half a 0.5%. This is the 13th consecutive increase in UK interest rates, going back to December 2021.
Investors were split in their estimates as to whether the Bank would choose a quarter-point, or a larger half-point hike.
The BoE was under pressure to tighten policy after UK inflation remained stubbornly high in April and May, at 8.7% in both months. But higher interest rates will intensify the pressure on borrowers, and could mean fixed-rate mortgage costs continue to rise. Economists fear that millions of households will lose major chunks of their income in the coming months to higher mortgage rates.
A strong "hawkish" signal was sent by the Monetary Policy Committee (MPC), which increased the bank rate by 50 basis points to 5.0%, with a majority vote of 7-2.
But in an outlandish turn of events, Tenreyro and Dhingra, two MPC members, chose to maintain the same interest rates.
Looking at the FX market reaction, we saw an initial knee-jerk appreciation in the GBP which confirms the initial 'hawkishness' signalled by the 50bp move. However, this soon gave way to selling pressures that will invite an avalanche of analyst commentary whilst the market is fixated on the UK's inflation problem.
GBP/EUR moved to daily highs of 1.1678 in light of the release, however has since stabilised around the 1.1630 mark – with further volatility being dependent on Governor Bailey’s press conference in the next 20 minutes.
GBP/USD also was subject to a considerable rally, with the rate breaching 1.28 again – with highs of 1.2855 being noted in the immediate aftermath. The cable pair now trades at 1.2792 and much like GBPEUR, the comments from Andrew Bailey will be key in establishing new levels for the cross.
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