The BoE was forced to raise interest rates again to cope with Britain's frenzied spike in inflation. Pound strengthened against Dollar, but fell versus Euro.
The Bank of England (BoE) raised interest rates to a level of 0.5% on Thursday (03/February) afternoon, to cope with the spike in UK inflation which is expected to reach 7%.
Before the rate hike was agreed, the difference in the votes of the members of the BoE MPC meeting was apparently quite sharp. Initially, four of the nine members wanted a rate hike to 0.75%. While five others, including BoE Governor Andrew Bailey, supported the 0.25% rate remained. In the end, the 0.5% interest rate was agreed by a five-to-four vote.
Since December 2021, the BoE became the first major central bank to raise interest rates since the pandemic. However, Governor Bailey warned investors not to assume the BoE rate hike is in the long run, although it is very likely that there will be another rate hike in the near future. This is because the British economy is unstable, where inflation is skyrocketing but growth is collapsing so that people's incomes are squeezed.
"We are not raising interest rates because the economy is improving," Bailey said at a press conference today, "Interest rate increases are needed because inflation is unlikely to return to target if it (rate hike -ed) is not done." Bailey also added that Britain was being an "extreme example" of the phenomenon of economic shocks that would increase people's costs of living.
Responding to the BoE's policy today, analysts said that the risk of UK financial difficulties would actually increase. According to RaboBank analyst Richard McGuire, the BoE solved the supply problem by hitting the demand sector. James Athey of Abrdn also said that the BoE would not be able to win under the current policy scenario. The market will even assume that inflation will not be able to drop significantly if the BoE does not create a recession.
Following the BoE announcement this month, the market was expecting UK interest rates to hit 1.0% in May and rise to 1.5% by the end of 2022.
GBP/USD And EUR/GBP Rise
GBP/USD edged up 0.10% to 1,359, extending a one-week rally. The US dollar is indeed weakening awaiting the release of US NFP data tomorrow night. However, the Pound is actually under pressure against the Euro. EUR/GBP is up more than 1% to 0.8412 as the Euro strengthens after the ECB's policy announcement.
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