The Bank of England announced its decision to hike interest rates by 0.25% to 1.25% at its meeting today, hot on the heels of the US Federal Reserve’s announcement yesterday that it would be raising rates by 0.75% to between 1.5% to 1.75%.
The move came as no shock to the markets, which have been pricing in this prediction since the institution’s last rate hike to 1% in May.
“The market saw this one coming. Even before the rate rise, UK banks had a skip in their step earlier in the week,” said Freetrade analyst Gemma Boothroyd.
“After all, they’re the ones primed to benefit here … Mortgage lenders will raise rates, making buying a home more expensive.”
“That’s bad news for Britons looking to get a leg up on the property ladder, but good news for the banks’ coffers.”
The rates hike follows weaker than expected GDP in May, with a startling contraction of 0.3% on the back of declining Test and Trace activity, with the Bank of England noting an expected 0.3% dip in Q2 overall.
The decision was voted for by a majority of six against two, with the members in the minority advocating for a more aggressive advance of 0.5% instead in a bid to stamp out surging inflation.
“The Bank of England is playing a game of slowly, slowly catchy inflation, rather than the shock and awe tactics being employed across the Atlantic,” said AJ Bell head of investment analysis Laith Khalaf.
“Despite the UK starting to tighten monetary policy first, interest rates are now higher in the US.”
“Markets will no doubt seize on this as a sign the Bank of England has bottled it, but an incremental strategy allows the rate setting committee to observe more data as it comes in, and fine tune its approach as circumstances dictate.”
Inflation Concerns
The rates climb is set to prove a rather soft blow to the UK’s soaring inflation, which hit a record-breaking level of 9% last month.
The Bank of England predominantly pinned the blame for spiking inflation on soaring prices in global energy as a result of the Ukraine war, and climbing prices across other tradable goods linked to the Covid-19 pandemic, which served as a heavy disruption to supply chains.
“No-one should labour under the misapprehension that interest rate rises are going to do anything about eye-watering levels of inflation in the short term,” said Khalaf.
“Our inflationary problem is being driven by a supply shock to energy markets stemming from the conflict in Ukraine, and the ensuing sanctions, and no number of interest rate rises will solve that problem.”
“What the Bank is trying to do is head off second order inflationary effects becoming ingrained in the system and taking on a life of their own.”
However, domestic factors also contributed to the CPI increase, including a tight labour market and the pricing strategies of firms.
“There are currently 1.3 million job vacancies in the economy, and extremely low levels of unemployment. The result is a clamour for staff in some industries, which has resulted in an 8% jump in private sector wages in the last year,” said Khalaf.
“While businesses may have an eye on the increasing cost of servicing their debt, for many their more pressing concern is having enough staff to open the doors and keep the tills ringing.”
“The Bank may find that the huge dislocation in the labour market means that pressing down hard on the brakes has a more limited effect on wage increases than desired.”
The Bank of England also updated its estimate for peak 2022 inflation, with a revision to 11% inflation in Q4 rather than 10% as a result of higher projected household prices linked to a prospective large rise in the Ofgem price cap.