LONDON (Reuters) - The Bank of England raised interest rates to 0.5% on Thursday and nearly half of its policymakers wanted a bigger increase to contain rampant price pressures, as the British central bank warned inflation will soon top 7%.
In a surprise split decision, four of the nine members of the Monetary Policy Committee wanted to raise interest rates by half a percentage point to 0.75% in what would have been the biggest increase in borrowing costs since the BoE became operationally independent 25 years ago.
MARKET REACTION:
Sterling rose to its highest level in two years versus the euro.
British gilt yields shot higher after the BoE move dragging euro zone bond yields with them.
Britain's equity markets moved further down in negative territory on the news with London's blue chip index FTSE 100 losing 0.3% while the mid-cap index fell to -0.6%.
Here are some reactions from economists and analysts:
MARCUS WIDEN, ECONOMIST AT SEB:
"After today’s rate hike, we are likely entering a period of more regular rate hikes, but after today’s decision we expect them to be even more front loaded. To achieve less expansionary monetary policies, rate hikes are probably preferable to QT, for several reasons."
"Central banks, including the BoE, have far more experience with rate hikes, i.e., the transmission mechanism and the impact on the private sector’s balance sheets and on overall financial conditions. There is also a lot of uncertainty about how shrinking balance sheets affect the real economy. From a communication standpoint, rate hikes are also preferable because they provide the public with a clearer picture of the central bank’s intentions."
KALLUM PICKERING, SENIOR ECONOMIST, BERENBERG:
"Gradual rate hikes plus a passive QT are a sensible response to growing inflation risks. While gilt markets may initially overreact to today’s policy decisions, causing benchmark rates to spike, the gradual normalisation of interest rates that coincides with above-trend growth and strong nominal momentum should not present a major risk to the upswing or the UK’s financial system."
CAPITAL ECONOMICS:
"The Bank appears more hawkish in three ways. First, the vote was 5-4 and the four in the minority all wanted to raise rates to 0.75%. Second, not only has the Bank decided to start unwinding QE in line with its previous guidance, but it has said it will sell its £20bn holdings of corporate bonds. That’s a quicker rundown of the balance sheet than we expected. Third, the MPC revised up its CPI inflation forecast so that it peaks at 7.25% in April and is further above the 2.0% target for all of 2022 and 2023."
RICHARD MCGUIRE, HEAD OF RATES STRATEGY AT RABOBANK
"We think that they are effectively cracking a supply side nut with a demand side hammer."
"I think central banks remain of the view that these are supply pressures that we are being subject to but short-term inflation expectations have clearly risen notably. They are worried increasingly that these expectations will feed into the longer-dated inflation outlook so they are making one or two policy errors: either they do nothing and wage growth accelerates further and we get second round effects... or they raise rates even though it's not a demand side problem and everybody is feeling poorer because of this."
DEAN TURNER, ECONOMIST AT UBS GLOBAL WEALTH MANAGEMENT:
"In addition to the rate announcement, the Bank revealed that gilt reinvestments will stop and, in another unexpected move, the 20 billion pounds corporate bond portfolio will be sold by the end of next year. A hawkish surprise, but the key question remains: how many further hikes will we see this cycle? Given their revised economic projections, which sees near-term inflation higher than previously forecast, we are still of the view that investors should be braced for at least two more hikes from the Bank this year."
"Sterling rallied on this afternoon’s announcement and is trading at a two year high against the euro. In our view, a hawkish BoE will lead to further gains against the single currency in the month ahead. Against the US dollar, making headway will be more challenging, as the Federal Reserve is in an equally hawkish mood.”
RICHARD FLAX, CHIEF INVESTMENT OFFICER AT DIGITAL WEALTH MANAGER MONEYFARM:
"The increase in rates was largely as expected, but the vote was 5-4 with a minority in favour of a 50 basis point hike which sent a slightly more hawkish message. That, combined with a timetable for asset divestments, highlights that the MPC is keen to address the stubbornly high inflation rates and normalise monetary policy."