LONDON (Reuters) - The Bank of England raised interest rates for the 14th time on Thursday to their highest since early 2008, and signalled borrowing costs will likely stay high for some time, sending the pound and stocks lower.
The pound initially dropped, before paring some of those losses, while stocks remained in the red.
The BoE raised interest rates by 25 basis points to 5.25% and said high inflation meant it was unlikely to stop raising rates any time soon.
"Some of the risks of more persistent inflationary pressures may have begun to crystallise," the BoE said in new guidance about the outlook for rates.
However, with Thursday's decision, traders began to price in a lower peak in UK rates.
MARKET REACTION:
STOCKS: The FTSE 100 traded down 0.8% on the day, extending losses, while the more domestically focused midcap index rose 0.1%.
FOREX: Sterling fell by as much as 0.7% immediately after the decision. It was last down 0.5% at $1.2672.
MONEY MARKETS: Interest-rate derivatives showed traders believe UK rates will peak around 5.67% by March, compared with an expected peak of 5.73% in the run-up to the decision.
COMMENTS:
VIVEK PAUL, UK CHIEF INVESTMENT STRATEGIST, BLACKROCK INVESTMENT INSTITUTE, LONDON:
“With over 500 basis points in cumulative tightening so far, it is hard to see the UK avoiding a period of weak economic growth."
"Whether or not a recession formally occurs is secondary to the bigger picture – when we look back at this period in decades to come, we’ll likely see this as the middle of a multi-year stretch of near-zero growth."
STUART COLE, CHIEF MACRO ECONOMIST, EQUITI CAPITAL, LONDON:
"I think we are also seeing a bit of mixed messaging creeping in. On the one hand, we are told that further tightening will be delivered 'if' there is evidence of persistent pricing pressures, suggesting possibly a dovish tilt in the language.
But at the same time, the inflation profile has been revised upwards from May’s forecast, while the minutes are also alluding to persistent pricing pressures now starting to crystalise with the message that rates will be kept “sufficiently restrictive for sufficiently long”.
JEREMY BATSTONE-CARR, EUROPEAN STRATEGIST, RAYMOND JAMES INVESTMENT SERVICES, LONDON:
" While inflation has begun to abate, prices in the service sector remain worryingly elevated and above levels forecast in the previous Monetary Policy Report. An unsettled committee, whose predictions have not materialised, has therefore continued on a rate-hiking course."
"If the hawkish forward guidance holds true and wage growth and service sector prices remain strong, the base rate may be raised even further".
TOM HOPKINS, PORTFOLIO MANAGER, BRI WEALTH MANAGEMENT, LONDON:
"The level of wage growth and services inflation is still high, and the labour market remains tight. Rising interest rates means higher borrowing costs, which will lead to larger monthly mortgage payments for many homeowners."
"The UK continues to teeter on the brink of recession. The Bank of England remains committed to bringing inflation down, unfortunately raising interest rates is one of the only tools the Bank can use to sap demand out of the economy."
MARCUS BROOKES, CHIEF INVESTMENT OFFICER AT QUILTER INVESTORS, LONDON:
"The BoE is walking a tightrope at this stage, where the interest rate rises we have seen could tip the UK economy into recession. The BoE will want to avoid that, but may have no choice in order to tame inflation. The U.S. is looking increasingly likely that it could achieve a soft landing by keeping economic growth ticking along as inflation comes down. The UK has no such luxury, and as such should a recession become more likely then we will see how long the line that rates will stay this high for an extended period of time can hold.”
SEEMA SHAH, CHIEF GLOBAL STRATEGIST AT PRINCIPAL ASSET MANAGEMENT, LONDON:
"It’s perhaps a little astonishing that, with inflation sitting at 7.9%, the Bank of England has managed to sound somewhat dovish today. Clearly the weaker-than-expected June inflation number has strongly influenced the Bank’s decision to hike by just 25 basis points rather than the 50 basis points, although the three-way split in voting suggests that there are still a couple of hawks who are very concerned by the extremely elevated inflation numbers.
The Bank’s growth outlook is appropriately bleak. While Rishi Sunak will be relieved to see the UK is expected to escape recession, economic stagnation through to 2025 will certainly make for a challenging election backdrop. Policy rates may not rise all the way to 6%, as had been feared a month ago, but the economic damage will still be significant."
GILES COGHLAN, CHIEF MARKET ANALYST, HYCM, LONDON:
"Today's decision was a close call, with policymakers divided between a 25bps or 50bps rate hike. Given that the latest inflation data has shown demonstrably that the Bank of England’s bitter medicine is starting to work, shifting gears down to a 25bps hike was sensible."
"Despite concerns about economic growth, today’s hike is yet another sign that the central bank’s quantitative tightening could be nearing completion, and we should see the hiking cycle soon coming to a halt, with more modest hikes in the pipeline until then. Investors should expect some volatility in the aftermath of today’s decision."
THOMAS PUGH, ECONOMIST, RSM UK, LONDON:
"The recent fall in inflation and signs of a faltering economy meant that the MPC felt it had enough room to revert back to a 25bps rise in August.
However, one weak data point will not be enough for the Bank to be satisfied that inflation is now on a sustainable trajectory. We expect at least one more 25bps rate hike in September, whether that is followed by another one will depend on the inflation and labour market data between now and then."
JOHN LEIPER, CHIEF INVESTMENT OFFICER, TITAN ASSET MANAGEMENT, LONDON:
"The relative disparity in the trajectory of future monetary policy, against a backdrop of better-than-expected economic growth data, has catalysed a rally in the UK pound this year but momentum has dwindled recently, following the latest inflation number, which came in below expectation for the first time in four months, and signs today that the bank is becoming a little more relaxed around the direction of travel.”