UK – Bank of England does not speed up rate hikes, but says it is ready to act ‘by force’

Andy Bruce and William Schomberg

LONDON (Reuters) – The Bank of England (BoE) on Thursday announced a quarter-point hike in its key interest rate, the fifth hike since December, and vowed to act “strongly” if necessary to face inflation-related risks. that he expects to even exceed 11% in a few months.

A hike in the UK key rate to 1.25% is in line with the consensus based on the forecasts of economists and analysts polled last week by Reuters, but the implied probability of a half-point hike has increased significantly in recent days to nearly 50%.

Therefore, the central bank decided to maintain a gradual tightening of its strategy, which it justifies with the prospect of a 0.3% contraction in economic activity in the April-June quarter.

The decision was passed by six votes, with three members of the Monetary Policy Committee (MPC) voting in favor of a half-point increase.

The UK discount rate is currently at its highest level since January 2009.

In December, the Bank of England became the first of the world’s largest central banks to begin a cycle of raising interest rates, facing a deteriorating economic environment that combines high inflation and slower growth.

But some see the tightening as too slow to rein in inflation and prevent it from taking root in the economy through higher wages and rising price expectations.

“The scale, pace and timing of any further interest rate hike will reflect the committee’s assessment of the economic outlook and inflationary pressures,” the Bank of England said in a statement.

“The committee will be especially vigilant for signs of more sustained inflationary pressures and will act decisively if necessary,” he adds.

“PARTICULARLY WEAK” POUND

UK consumer price inflation hit 9% in April, the highest level in 40 years, and the Bank of England raised its forecast on Thursday, saying it now expects a peak of just above 11% in October when energy prices rise again.

The ongoing spike in inflation looks set to last longer in the UK than elsewhere, partly because of the backlog caused by the gas and electricity price hike mechanism, but also because of the impact on foreign trade of the country’s exit from the European Union.

The depreciation of the pound sterling in recent weeks, largely due to expectations of higher interest rates in the US and the eurozone, also threatens to spur inflation.

In its press release, the Bank of England also notes that the pound is “particularly weak against the US dollar.”

The US Federal Reserve announced on Wednesday a three-quarter point rate hike, the largest in the United States since 1994, while the Swiss National Bank (SNB) surprised markets Thursday by raising its own interest rate. points, by -0.25%.

For its part, the European Central Bank (ECB) said last week that it was preparing a rate hike for its next two meetings, in July and September.

In financial markets, British 10-year government bond yields surged 2.571% minutes after the BoE announcement, while the pound fell 0.84% ​​against the dollar to 1.2076.

On the London Stock Exchange, the FTSE 100 index then brought in 2.41%.

(Report by William Schomberg and Andy Bruce, French version by Marc Angrand)