The Bank of England has raised rates to 0.25% for the first time in three years in a surprise move that sent the pound and bond yields higher.
USD/GBP was 0.79% higher at 1.3367 and the UK 10-year gilt yield rose to 0.797% in the immediate market reaction. The FTSE 100 dipped slightly 7,241 but held onto 1% gains on the day.
The Bank of England had to balance the impact of soaring inflation on households and businesses with the economic impact of the new coronavirus variant. The possible negative impact of inflation won.
Inflation has recently hit 5.1% – the highest level for 10 years – driven by rising food and fuels costs. This proved too much for the Monetary Policy Committee who voted 8-1 in favour in hiking rates.
Today’s move would suggest the Bank of England is planning to walk a similar path as the Federal Reserve in embarking on a series of hikes to help fight rising prices.
However, trying predict what the Bank of England will do next could be a source of uncertainty because the Bank of England has surprised markets on a number of occasions now and provided mixed messages.
The Bank of England did say they saw inflation peaking around 6% in April. A sustained period of inflation would demand further action from the Bank of England to help preserve household spending power.
“Whilst there was some thought that the emergence of Omicron may delay any rate rises, the rise has only been marginal with rates moving from 0.10% to 0.25% and this is unlikely to slow the economy much,” said Dan Boardman-Weston, CIO at BRI Wealth Management.
“We think the Bank needed to send a message that they are taking the threat of inflation seriously and leaving rates at the same level in the same week inflation moved over 5% would have been poorly received.”