TL;DR Breakdown
- Experts say the Bank of England’s surprise hefty interest rate hike is not the final one it will make this year.
- Bank says it is targeting to return inflation to the 2% target and will make the necessary move to see that it happens.
Description
The Bank of England’s surprise large interest rate hike is not the final one it will make this year, according to traders. The bank raised interest rates by half a percentage point today to a 15-year high of 5% to tackle the rising inflation. The large hike was a surprise because the bank is on … Read more
The Bank of England’s surprise large interest rate hike is not the final one it will make this year, according to traders. The bank raised interest rates by half a percentage point today to a 15-year high of 5% to tackle the rising inflation. The large hike was a surprise because the bank is on its 13th rate hike in a row, whereby most economists predicted a lower quarter-point increase during today’s announcement.
Another hike could be coming by September
According to Bank of England Governor Andrew Bailey, the economy is better than expected, but inflation is still very high and must be dealt with. He added that they understand it is hard, and many people with loans or mortgages will worry about what the move means for them. However, he said, if the rates don’t go up now, they could worsen in the coming days.
Meanwhile, the bank is targeting to return inflation to the 2% target and will make the necessary move to see that it happens. However, the rate hikes are bad news for mortgage holders in the U.K. due to increased monthly mortgage bills when refinancing this year and the next.
Following the surprise interest rate hike, traders are betting another hike is soon coming by September. The market is pushing for more forceful action since the Bank of England’s rate hikes have failed so far to slow inflation. Jamie Niven, a fund manager at Candriam, states that the Bank of England may have to conclude that a recession may be necessary to achieve its inflation target. He added that they expect the consumer to continue to be hit hard, especially in the housing sector.
Following the Bank of England’s announcement, traders priced another 75 basis points of tightening over the coming two meetings. Hence, it would require one half-point hike and a quarter-point raise around August and September. As for the odds of it happening around August, they stand at about 80%.
Heading for a recession?
The Bank of England’s interest rate hikes come at a cost, and there is growing concern for the British economy. So far, the economy has managed to steer clear of recession.
Luke Bartholomew, the senior economist at asset management firm abrdn, mentioned that it is increasingly hard to see how the U.K. avoids recession in its move to lower inflation. He added that today’s large rate hike might be seen retrospectively as a crucial milestone towards that recession. In a recession, unemployment increases, and home repossessions increase. Notably, this isn’t something the Conservative government wants as the likely general election happens next year.
Bailey has denied in an earlier interview that the bank is looking to trigger a recession. He added that they are not expecting any recession but will do what is necessary to keep the inflation low, at its target level.
Central banks are increasing interest rates
Around the world, central banks have rapidly increased interest rates over the last years to lower the inflation rate that first went up due to supply chain backups tied to the rebound from the pandemic. Furthermore, the Russian invasion of Ukraine led to energy and food cost surges.
Across Europe, central banks also pushed their borrowing costs today, including Norway with a half-point increase and the Swiss National Bank with a quarter-point hike. As for the U.S. Federal Reserve, it has paused the hikes but has indicated that there could be more hikes this year.
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