Home NewsEconomy News Bank of England hikes rates again but shows unease over outlook By Reuters

Bank of England hikes rates again but shows unease over outlook By Reuters

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© Reuters. FILE PHOTO: City workers walk past the Bank of England in London on February 13, 2008.REUTERS/Toby Melville

Andy Bruce and David Milliken

LONDON (Reuters) – The Bank of England raised interest rates again on Thursday to stop fast-rising inflation from becoming entrenched, but it softened its rhetoric about the need for further hikes as households face a huge hit from soaring energy bills.

Eight of the nine Monetary Policy Committee (MPC) members voted to raise the bank rate from 0.5% to 0.75%, restoring the benchmark for UK borrowing costs to pre-pandemic levels.

Bank of England Deputy Governor Jon Cunliffe was the only one in favor of keeping rates on hold, warning that higher commodity prices were taking a major hit to demand.

On Wednesday, the Fed also raised interest rates for the first time since the COVID-19 pandemic and signaled an aggressive plan for more rate hikes ahead, in contrast to the Bank of England’s more cautious approach.

The Bank of England raised interest rates three times in a row for the first time since 1997.

But investors were surprised that none of the policymakers opted for a 50-basis-point rate hike last month. A majority of economists polled by Reuters did not expect any vote to keep rates unchanged.

Citi economist Benjamin Nabarro said: “The MPC sent a clear dovish tone today, in stark contrast to the prevailing market narrative and the reasoning of the ECB and the Federal Reserve.”

The Bank of England said inflation would hit around 8% in April — nearly a percentage point higher than its forecast last month and four times its 2% target — and warned it could hit even higher later this year. high peak.

Soaring energy bills due to the conflict in Ukraine means that the pressure on British household budgets could be far greater than the record 30-year tightening predicted by the Bank of England last month.

Concerned about the growth outlook, policymakers on Thursday dismissed investor bets that bank rates would rise sharply to around 2 percent by the end of the year and played down language that further hikes would be needed.

“The Committee’s judgement that further moderate policy tightening may be appropriate in the coming months is risky on both sides depending on how the medium-term outlook evolves,” the Bank of England said.

Last month, the Monetary Policy Committee said further moderate tightening “may be appropriate”.

Stalled cycle?

Sterling fell nearly 1 cent against the dollar and British government bond prices rose as investors pared bets that the Bank of England will raise interest rates quickly this year.

Samuel Tombs, an economist at Pantheon Macroeconomics, said the Bank of England was about to end its rate hikes.

“Today’s minutes give us more confidence that the rate hike cycle will stop after the committee raises the bank rate to 1.00%, most likely at its next meeting in May,” he said.

Tombs noted that the decline in bank rate expectations in the futures market was the second-biggest drop since records began in 2009, after the rate decision in November, when the Bank of England left rates unchanged, surprising many investors.

Inflation expectations remain solid, the Bank of England said. But most MPC members said they needed to raise interest rates now to reduce the risk of near-term wage growth and price trends pushing up longer-term inflation expectations.

Businesses surveyed by the Bank of England expect to raise wages by 4%-6% this year, compared with 2.5%-3.5% in 2021.

The Bank of England said the Russian invasion of Ukraine could lead to a significant increase in global inflationary pressures in the coming months and exacerbated supply chain disruptions.

Some analysts said the Bank of England’s stance on inflation had softened.

“What the MPC did today, concluded that the war in Ukraine poses bilateral risks to growth, putting itself further behind the inflation curve,” said Peter Chartwell, head of multi-asset strategy at Mizuho.

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