Bank of England lifts key rate to 4%, implying that more increases may be required.
Bank of England lifts key rate to 4%, implying that more increases may be required. The key rate reached its highest level since 2008 as a result of the decision, which was the tenth hike since the BOE resumed raising rates in December 2021.
The Bank of England hiked interest rates by half a percentage point, indicating that further hikes will be required if signs of an inflationary spiral persist.
About the Bank of England key rate inflation
Seven of the UK central bank’s nine-member Monetary Policy Committee supported the 4% increase, while two voted against it. The majority of respondents felt that robust wage increases and a continued labour shortage were fueling economic pricing pressures.
The key rate reached its highest level since 2008 as a result of the decision, which was the tenth hike since the BOE resumed raising rates in December 2021.
The economy is already in recession, according to officials led by Governor Andrew Bailey, but the dip will be shorter and weaker than predicted in November. Inflation risks remain “highly weighted to the upside.” The committee cited this year’s unprecedented pay settlements.
What BOE predicted?
The BOE predicted that the gross domestic product would fall by approximately 1% over the course of five quarters. The government of Prime Minister Rishi Sunak will have difficulties as a result of having to conduct elections by the beginning of 2025. According to the BOE, 500,000 additional employees will lose their employment before the economy reaches pre-pandemic levels of output, which won’t happen until at least 2026.
Despite the bleak backdrop, the BOE appeared to confirm the market’s expectation that rates will peak at roughly 4.5% in the coming months. “If there is indications of more sustained pressure, then more tightening in monetary policy will be required,” the panel said.”
The market now expects interest rates to be reduced next year. The BOE reduced its guidance that it would respond “forcefully” in an indication that the end of the rate-hike cycle is nigh “If needed.
The MPC’s breadth of opinions underscored the challenge of tackling inflation, which is reaching a 40-year high, while also coping with a challenging economic outlook.
Who all supported the hike in rate?
Silvana Tenreyro and Swati Dhingra voted to keep rates unchanged, claiming that the impact of previous hikes has yet to be seen fully. Catherine Mann, who previously voted for a 75-basis-point increase, now joined Bailey and the majority of MPC members in asking for a 50-basis-point increase.
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