Bank Of England Surprises With 50 Bps Rate Hike

(RTTNews) - Persistence of inflation convinced Bank of England policymakers to act more aggressively and signaled more tightening even as higher interest rates hit mortgage holders hard and the surprise move raised market expectations regarding the level at which the UK bank rate would peak.

The Monetary Policy Committee, led by Governor Andrew Bailey, decided to increase the bank rate by a bigger-than-expected 50 basis points on Thursday. Markets had forecast only a quarter point hike.

The bank has lifted the benchmark rate over the last thirteen consecutive policy sessions, taking it to the current 5.00 percent, which was the highest since 2008.

Seven members of the panel said a half percentage point hike was warranted at the June meeting as the second-round effects in domestic price and wage developments generated by external cost shocks were likely to take longer to unwind.

The upside surprises in official wages and services inflation suggested that 50 basis point increase was required at this particular meeting.

Other two dovish members, Swati Dhingra and Silvana Tenreyro, preferred to keep the interest rate unchanged at 4.50 percent. "If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required," the bank said.

The BoE said the interest rate would be adjusted as necessary to return inflation to the 2 percent target sustainably in the medium term.

The latest 50 basis points move would not become a new trend but two further quarter point hikes seem like the most likely route, ING economists said.

"The risk is that the Bank needs to raise rates further to get inflation down, meaning that the chances of a bigger recession are growing," Capital Economics economist Ruth Gregory said. The BoE is likely to continue to hike rates even after the Fed's tightening cycle draws to a close and keep rates higher for longer, the economist added.

Last week, the US Federal Reserve paused its rate hikes after ten consecutive increases but Chair Jerome Powell has signaled more.

The European Central Bank had raised its key rates by another quarter point and President Christine Lagarde has said a July hike is likely.

Official data released on Wednesday showed that UK consumer price inflation held steady at 8.7 percent in May, which was 0.3 percentage points higher than expected at the previous MPC meeting.

Moreover, services inflation and core inflation proved to be much stronger than projected.

Inflation data had triggered the exchange of open letters between BoE Governor Andrew Bailey and the Chancellor.

Consumer price inflation is expected to fall significantly over the course of the year, reflecting developments in energy prices. Services inflation was forecast to remain broadly unchanged in the near term.

BoE staff forecast headline GDP to be flat in the second quarter, in line with the May Report. Although the outlook for the third quarter was more uncertain, bank staff expects an underlying quarterly growth of around 0.25 percent.