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Bank of England raises UK interest rates… to 14-year high of 2.25%

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News Flash: The Bank of England has raised UK interest rates by 0.5 percentage points to 2.25% in a bid to combat rising inflation amid the cost of living crisis.

That is the seventh consecutive increase in Bank Rate, but a smaller increase than many investors in the City had expected.

Today’s rate increase – the second 50bp increase in a row – shows that the Bank is trying to keep inflation from taking root, despite concerns about the economy.

The Bank’s monetary policy committee decision takes rates to the highest level since 2008.

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The Bank has promised to act ‘forcefully’ to tame inflation – a sign that further increases in interest rates are coming, even though it believes the UK is in recession.

The Monetary Policy Committee insists that “policy is not on a default path”, as it tries to get inflation down to its 2% target, from 9.9% at the moment.

Although a narrow majority of the committee resisted a three-quarters of a per cent rate hike, the MPC says it will be forceful:

The Committee will, as always, consider and decide on the appropriate level of Bank Rate at each meeting.

The scale, speed and timing of any further changes in the Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.

If the forecast suggests more sustained inflationary pressures, including stronger demand, the Committee will respond forcefully, as necessary.

… Bank warns that it is prepared to be “forceful” on future rate rises, despite securing a smaller increase today than the Fed yesterday and than expected by some … pic.twitter.com/HsfLmWtmdu

— Ben Chu (@BenChu_) September 22, 2022

The Bank of England will assess the impact of a small budget tomorrow in time for its next interest rate decision in November (when it publishes new forecasts).

The MPC says:

All members also agreed that the upcoming Growth Plan would provide further financial support and would likely contain news relevant to the economic outlook.

In the November MPC round, the Committee would make a full assessment of the impact on demand and inflation of all these announcements, together with other news, and determine further implications for monetary policy.

The Bank of England will assess the impact of inflation @KwasiKwartenga huge ‘small budget’ – what the government calls “The Growth Plan” – in its assessment in November, he said. That’s when we’ll have a clearer idea of ​​whether markets are right that Bank Rate could double…

— Robert Peston (@Peston) September 22, 2022

Energy bill freeze will ‘add to inflationary pressures’

The Bank of England has also warned that the government’s energy price freeze will push inflation up in the medium term.

With energy bills rising less sharply, households will have more money to spend on other goods and services (although some people are already having to skip meals due to rising bills)

The Monetary Policy Committee saying:

Although the Guarantee reduces inflation in the near term, it also means that household spending is likely to be less weak than predicted in the August Report over the first two years of the forecast period.

All else being equal, and compared to that forecast, this would add to inflationary pressures in the medium term.

That is a sign that monetary policy may need to be tightened more aggressively in the future – meaning higher interest rates for a longer period.

Bank of England: the UK is already in recession

The UK is already in recession, the Bank of England fears, partly because of the bank holiday to mark the Queen’s funeral.

Bank staff have downgraded their growth forecasts, and now predict that GDP will contract by 0.1% in the third quarter of the year.

That would follow the 0.1% drop recorded in April-June – making it the second quarterly contraction in a row.

A month ago, the Bank had predicted that the economy would grow by 0.4% in July-September.

But weaker-than-expected growth of just 0.2% in July, and Monday’s bank holiday for the state funeral, have seen his outlook slashed.

The minutes of this week’s meeting say:

The bank’s staff now expected GDP to fall by 0.1% in Q3, below the August Report’s projection of 0.4% growth, and a second consecutive quarterly decline.

That reduction would also, in part, reflect the smaller-than-expected bounce back in growth following the bank holiday in Q2 and the expected impact of the additional bank holiday in September for the Queen’s state funeral.

NEW

The Bank of England raises interest rates again by 0.5% to 2.25%, a 14-year high.

Although the energy plan now means it expects inflation to peak next month at 11%, the Bank now assumes the UK is already in recession from April, with GDP falling this quarter as well as last year.

— Faisal Islam (@faisalislam) September 22, 2022

Bank sees inflation peak lower thanks to energy bill freeze

The Bank has lowered its forecast for inflation, due to the energy price freeze.

They now predict that CPI inflation is likely to peak in October at just under 11% – down from the peak of 13% forecast last month, before the two-year cap on bills was announced .

The minutes of the meeting warn, however, that we could suffer double-digit inflation for months:

However, energy bills will continue to rise and, together with the indirect effects of higher energy costs, inflation is expected to remain above 10% over the coming months, before beginning to fall back.

The Bank has also decided to start unwinding its stock of UK government bonds, built up through its quantitative easing program following the financial crisis, and then the pandemic.

It will reduce the stock of bonds bought by the UK government by £80bn over the next twelve months, to a total of £758bn.

This is “in line with the strategy set out in the minutes of the MPC meeting in August”, he said.

It means the Bank will reduce its holdings, just as the UK government tries to borrow more, to finance caps on energy prices and likely tax cuts.

Bank of England split 5-3-1 over rate rise

The Bank of England’s monetary policy committee was badly divided over today’s interest rate decision.

Five members – governor Andrew bailiffdeputy governors Ben Wide a Jon Cunliffechief economist Huw Pilland an external member Silvana Tenreyro – voted to raise rates by half a percent, to 2.25%

Three – external member Jonathan Haskell a Catherine Placetogether with a deputy governor Dave Ramsden – pushing for a bigger increase, 75 basis points (which would have been the biggest since 1989).

And the newest member of the MPC, Swati Dhingravote to raise rates by just 0.25%.

This lack of unanimity does not bode well for the Bank.

Bank of England raises UK interest rates… to 14-year high of 2.25%

News Flash: The Bank of England has raised UK interest rates by 0.5 percentage points to 2.25% in an attempt to combat rising inflation during the cost of living crisis.

That is the seventh consecutive increase in Bank Rate, but a smaller increase than many investors in the City had expected.

Today’s rate increase – the second 50bp increase in a row – shows that the Bank is trying to keep inflation from taking root, despite concerns about the economy.

The Bank’s monetary policy committee decision takes rates to the highest level since 2008.

A very ten minute warning to the Bank of England.
They should (think the £) increase interest rates by 0.75%.
They could increase interest rates by 0.5%

— Shaun Richards (@notayesmansecon) September 22, 2022

UK government energy measure freezes strength encouraged the Bank of England to resist raising rates by as much as three quarters of a percent.

The average domestic energy bill is frozen at £2,500 a year until 2024, replacing Ofgem’s price cap which was due to rise to £3,549 on 1 October, and then again in January.

That means CPI inflation should peak lower and earlier than expected (but still leave households paying much more for energy than a year ago).

RBC Capital Markets explains:

That should, in turn, weaken the argument that the MPC should act to accelerate the tightening in the coming months in order to manage inflation expectations in the face of high and rising inflation here and there while also providing some room for the Committee to put more weight on the prospects for activity when making decisions.

We will find out in 15 minutes….

Ricardo Evangelista, senior analyst, ActivTrades, says it is “widely assumed” that the Bank of England will announce a rate increase of 75 basis points.

The BoE’s own predictions point to an incoming recession, while the government has to borrow huge sums in order to mitigate the effects of a devastating increase in the country’s cost of living.

Looking ahead, despite the move to a more hawkish stance by the central bank, the pound is likely to remain under pressure due to the country’s subdued economic outlook.

Last month, the Bank raised interest rates by 50bp:

UK interest rates

The city prepares for the Bank of England rate decision

Tension is building in the City, as investors prepare for the Bank of England interest rate announcement at midday.

We expect a massive rise in borrowing costs – at least another half a point, as the central bank tries to cool inflation despite fears that the UK is heading for recession.

Many traders are predicting that the BoE could raise rates by three quarters of a percent. That would take the Bank’s rate to 2.5%, from 1.75% today, the highest since the start of the financial crisis.

That would be the biggest rate rise since 1989 – and with inflation at 9.9% in August, the Monetary Policy Committee may choose to tighten policy aggressively. Especially as the Federal Reserve raised its key interest rate by another 75bp last night, knocking the pound to 37-year lows today.

The decision has been delayed for a week due to the funeral of Queen Elizabeth II.

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