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Bank of England raises rates to 3.5%, says inflation has peaked

by jcp
gawdo

(This Dec. 15 story has been corrected to change Robert Dishner’s location to London from Chicago in paragraph 33)

LONDON (Reuters) – The Bank of England on Thursday raised interest rates by a widely expected 50 basis points (bps) to 3.50%, in its ninth straight increase – and its eighth this year.

The BoE, which is battling double-digit inflation that has unleashed a cost-of-living crisis that is pushing the economy deeper into recession, has raised rates by a combined 325 bps in 2022 alone to their highest since late 2008.

UK rates began rising in December 2021, making the BoE the first of the world’s major central banks to kick off a monetary policy-tightening cycle.

BoE Governor Andrew Bailey, in a letter to finance minister Jeremy Hunt accompanying the decision, said the BoE forecasts suggested British inflation, which dropped below October’s 41-year highs to 10.7% last month, had reached its peak.

Furthermore, a breakdown of votes by Monetary Policy Committee members showed policymakers divided.

Some voted for an outsized 75-bps rise, while others said now was the time to stop tightening monetary policy altogether.

The pound fell, while benchmark British government bond yields declined, falling 6 basis points to 3.24%.

MARKET REACTION:

STOCKS: London’s blue-chip FTSE 100 index briefly losses and was last down 0.5%, while the FTSE 250, a more domestic-focused index of mid-cap stocks, was down 0.4%.

FOREX: Sterling fell against the dollar, to last trade down 0.8% at $1.2332, little changed from where it was prior to the central bank’s decision.

MONEY MARKETS: Interest rate swaps showed investors expected rates to peak at 4.46% by next August, compared with an anticipated terminal rate of 4.53% just before the decision.

COMMENTS:

VIVEK PAUL, UK CHIEF INVESTMENT STRATEGIST, BLACKROCK INVESTMENT INSTITUTE, LONDON:

“There are going to be more rate hikes. They’re not done. There’s an element that the bank will stop a little bit before what markets are currently anticipating them to get to. Their own numbers have been pointing to a recession for a little while, and they’ve still materially hiked interest rates. Despite that, so I don’t think that’s going to stop them.”

EDWARD HUTCHINGS, HEAD OF RATES, AVIVA INVESTORS, LONDON:

“The Bank of England duly delivered on financial markets expectations of a 0.50% hike. With a 3-way split vote, it seems there is still much uncertainty amongst MPC members.

However, the Minutes state that the BoE do expect a recession for a ‘prolonged period’! After its recent bullish run, sterling strength could be somewhat more questionable from here and with further Quantitative Tightening to come plus a staggering amount of gilt issuance, 2023 will continue to be volatile for the UK gilt market”

KAREN WARD, CHIEF MARKET STRATEGIST EMEA, JP MORGAN ASSET MANAGEMENT, LONDON:

“We are not convinced that the UK’s inflation troubles are clearly behind us, and therefore suspect the BoE is still some way away from ‘peak rates’.

“Inflation may be coming down but it would be premature for the BoE to claim victory in the fight over inflation. The BoE may be able to moderate the pace and speed of interest rate hikes, but we believe we are at least 100 bps from the peak.”

JAN VON GERICH, CHIEF ANALYST, NORDEA, HELSINKI:

“I wouldn’t say it was a dovish move but it does show that central banks are getting uncomfortable with signalling rates are on a one-way path higher.

“There is a division at the BoE with some members voting for no change and some voting for big hikes, that tells you that there is uncertainty about the outlook.

“For sure the door is open to pausing at the next meeting but also open for continuing more hikes.”

STUART COLE, HEAD MACRO ECONOMIST, EQUITI CAPITAL, LONDON:

“For an investor though, given the turmoil we saw in UK markets in September/October, and in a year that has delivered 3 prime ministers, 4 chancellors and 2 mini-budgets, this lack of coherence from the MPC likely does nothing to begin installing a sense of confidence back into the UK as a safe destination for investment.”

NAEEM ASLAM, CHIEF MARKET ANALYST, AVATRADE, LONDON:

“Sterling is highly volatile after the Bank of England’s monetary policy (decision), which increased the interest rate as per the market expectations of 50 basis points. The fact that BOE members are not on the same page with respect to the bank’s monetary policy has created more confusion for traders.

“With rates moving higher, the cost of living crisis is going to cripple further, and it would have a further adverse influence on the UK economy. This is another reason that the sterling moved lower on the back of the bank’s decision.”

LEE HARDMAN, CURRENCY ANALYST, MUFG, LONDON:

“Initially, the market’s taken it as less hawkish than expected. So we’ve been highlighting comments referring to the 50 bps hike as being ‘forceful’, which is another indication that they’re stepping down the pace of hikes going forward, and that’s provided some relief for UK rates markets.”

“Other than that there doesn’t seem to be a great deal there in terms of a change in the outlook for policy. They still expect to do further rate hikes.”

ROBERT DISHNER, SENIOR PORTFOLIO MANAGER – MULTI SECTOR FIXED INCOME, NEUBERGER BERMAN, LONDON:

“Initial reaction is a dovish outcome with two members voting to keep the rate unchanged. However, the bank appears to be keeping its options open here citing improvement in growth forecasts from November and still strong labour markets. The overriding take away pre-press conference though is that two members think the hiking cycle should be over for now.”

MIKE COOP, CHIEF INVESTMENT OFFICER UK, MORNINGSTAR INVESTMENT MANAGEMENT, LONDON:

“The central bank ‘Super Thursday’ ends a year many will be glad to see the back of. However, with another 50-basis point rate increase from the Bank of England and inflation continuing to rise, 2023 looks set to be as rough if not rougher than 2022.”

PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:

“While the 50bp increase in the Bank rate was as expected, the extent of the divisions across the committee is an eyeopener. While it is normal to see policymakers disagree towards the end of a rate cycle, the split makes it more difficult to predict the extent to which interest rates will rise.

Our view is still that the Bank rate will peak at 4.0% and that cuts will arrive towards the end of 2023, but clearly the labour market data and the inflation numbers themselves have the capacity to force us alter our view at any point.”

 

(Reporting by London Markets Team; Editing by Alun John)

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