Another rise in UK interest rates today was widely expected, but Bank of England policymakers have had to tweak their inflation forecast. Our head of investment has the details.
The Bank of England voted 7-2 to raise interest rates by 25 basis points to 4.5% as widely anticipated, marking the twelfth consecutive rate increase, lifting the bank rate to the highest level since 2008. Two dissenters Dhingra and Tenreyro voted to keep rates on hold.
Governor Andrew Bailey said ‘inflation remains too high’ and ‘we have to stay the course’ underscoring his reasoning behind today’s hike. He added that inflation is on course to halve by the end of this year.
Financial markets anticipate further tightening from the Bank of England, with traders estimating that the Bank rate will hit around 4.88% in November, rising from 4.83% prior to the decision.
The central bank is no longer forecasting a UK recession, having upgraded its GDP forecasts. It expected economic growth of 0.25% in 2023 versus its February forecast for a contraction of 0.5%. It estimates unemployment to hit 3.8% in the fourth quarter, an improvement from its prior forecast for 4.3%.
However, it expects inflation to fall to 5.12% by the fourth quarter, higher than its previous estimate for 3.92% and wage growth is seen hitting 5% in the fourth quarter versus its February estimate for 4%. The Bank of England said food inflation is more persistent than forecast, but Bailey commented ‘we do see signs that food price inflation will start to slow.’
Sterling rebounded off the day’s lows following the Bank of England’s rate hike, but it remains in negative territory in today’s session against the US dollar.
The pound had been rallying close to a one-year high this week in anticipation of the central bank’s rate decision and thanks to improved inflation data in the United States, which catalysed weakness for the greenback on Wednesday. Cable (GPBUSD)’s gains turned red this morning, although the MPC’s rate hike tempered those declines.
The FTSE 100 turned negative after the announcement, partly driven by sterling, which has been pared back earlier declines. The UK large-cap index has also been weighed down by a number of companies such as Tesco (LSE:TSCO), BP (LSE:BP.) and HSBC Holdings (LSE:HSBA) which have gone ex-dividend today.
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