(Alliance News) - The Bank of England continued its hiking cycle on Thursday and acted more aggressively than some expected, by lifting UK interest rates by 50 basis points.
The BoE's hike took the benchmark bank rate to 5.00% from 4.50% previously. The move was somewhat of a surprise, as a 25 basis point hike was largely expected. However, Wednesday's red-hot consumer price index data, which showed the UK's stubborn annual inflation rate remained at a red-hot 8.7% last month, put the half-point hike on the table.
The fight to contain inflation has divided Threadneedle Street's policymakers. The vote to hike by 50 basis points was opposed by two policymakers, Swati Dhingra and Silvana Tenreyro, who would have preferred to leave bank rate unchanged. The BoE said the remaining seven voted in favour of the hike.
The BoE has now hiked for 13 meetings in succession. It was one of the first major central banks to enact a rate lift in the current cycle, but the UK's sticky inflation rate means it may be among the last.
"If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required," the BoE said.
"The second-round effects in domestic price and wage developments generated by external cost shocks were likely to take longer to unwind than they had done to emerge. There had been significant upside news in recent data that indicated more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand. Some indicators of future pay growth and goods inflation had weakened, but their properties as leading indicators had not been tested in a similar period of high inflation. The scale of the recent upside surprises in official estimates of wage growth and services CPI inflation suggested a 0.5 percentage point increase in interest rates was required at this particular meeting."
The BoE noted that market expectations for the terminal bank rate have risen recently.
"At the time of the previous MPC meeting and May monetary policy report, the market-implied path for bank rate averaged just over 4% over the next three years. Since then, gilt yields have risen materially, particularly at shorter maturities, now suggesting a path for bank rate that averages around 5.5%. Mortgage rates have also risen notably. The sterling effective exchange rate has appreciated further," the central bank said.
"The committee is continuing to monitor closely the impact of the significant increases in bank rate so far. As set out in the May report, the greater share of fixed-rate mortgages means that the full impact of the increase in bank rate to date will not be felt for some time."
The pound spiked in the way of the decision, rising as high as USD1.2830, from USD1.2781 beforehand.
By Eric Cunha, Alliance News news editor
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