The Bank of England (BoE) has increased its policy rate by 25 basis points to 4.25%, resulting in a drop in the GBP/USD exchange rate to around 1.2300. We discuss the implications of the decision and the market reaction.
The Bank of England (BoE) has raised its benchmark interest rate by 25 basis points to 4.25%, as expected by the market. This is the first time the central bank has increased rates since 2018, and it signals a shift away from the ultra-accommodative monetary policy that was implemented to support the economy during the pandemic.
The decision to hike rates was made in response to rising inflationary pressures, which have been fueled by supply chain disruptions and a rebound in consumer demand as the economy recovers from the pandemic. The BoE expects inflation to rise to around 5% in the coming months, well above its target of 2%. By raising rates, the central bank hopes to curb inflationary pressures and anchor inflation expectations.
The BoE’s decision to raise rates was not unanimous, with two members of the Monetary Policy Committee (MPC) dissenting. Jonathan Haskel and Michael Saunders argued that the economy is still too fragile to handle a rate hike and that there is still slack in the labor market. However, the majority of the MPC felt that the time was right to start normalizing monetary policy.
The market reaction to the BoE’s decision was mixed. The pound sterling initially rallied against the US dollar, hitting a high of around 1.2340, but quickly gave up those gains and fell to around 1.2300. This suggests that the market had already priced in the rate hike and was looking for more hawkish signals from the central bank.
Looking ahead, the BoE is likely to continue raising rates gradually over the next few years as the economy continues to recover. However, the pace of rate hikes will depend on how the economy evolves and whether inflationary pressures continue to build.
In conclusion, the Bank of England’s decision to raise interest rates by 25 basis points to 4.25% is a significant shift away from the ultra-accommodative monetary policy that was implemented to support the economy during the pandemic. While the decision was not unanimous, the majority of the Monetary Policy Committee felt that the time was right to start normalizing monetary policy. The market reaction to the rate hike was mixed, with the pound sterling initially rallying against the US dollar before giving up those gains.