The Bank of England raised interest rates by 75 bps to 3% on Thursday following an increase by the same amount in US interest rates over night.
As expected, the BoE and Fed both hike by 75 bps to 3% and 3.75% respectively.
“The 0.75% rise was expected by markets as inflation continues to hit multi-decade highs and after a pretty tumultuous few months for the UK economy,” said Dan Boardman-Weston, CEO and Chief Investment Officer at BRI Wealth Management.
However, the deviation in their potential trajectories was the biggest story, and main driver of markets on Thursday.
There is a clear divide appearing in the rhetoric of the two centrals banks. The Federal Reserve is hinting at the need for more rate hikes while the Bank of England is very gently suggesting that further rate hikes may do more harm than good.
The prospect of a hawkish Federal Reserve and dovish BoE sent GBP/USD 1.3% lower to 1.1235.
Sterling weakness
The weakness in the pound provided some relief to the FTSE 100 which spiked immediately higher after the announcement at 12.00pm on Thursday. The FTSE 100 had been lower in early trade after the Federal Reserve warned they were prepared to continue with large rate hikes.
The FTSE 100 jumped roughly 30 points from around 7,085 on the announcement, but the rally faded quickly with the FTSE 100 trading below 7,100 at the time of writing, down 0.67% on the day.
Gloomy outlook
The Bank of England provided a gloomy economic outlook saying that should the market’s rate trajectory be met, we could see a two year recession.
That’s if the Bank of England mets market expectations. Market expectation of UK rates have fluctuated wildly over the past month so the worst case scenario may well be avoided.
“The good news is that the restoration of calm in UK markets means the BoE faces less pressure to hike aggressively. UK interest rates are expected to peak at 4.75% in late 2023, much milder than over 6.25% priced in after the mini-budget,” said Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin.