Bank of England lifts interest rates to 1.25%
By Michele Maatouk
Date: Thursday 16 Jun 2022
(Sharecast News) - The Bank of England hiked interest rates by 25 basis points on Thursday to 1.25% - the highest level in 13 years - amid surging inflation.
Six members of the Monetary Policy Committee voted for a 25 basis points hike, while three voted for 50 bps. Jonathan Haskel, Catherine Mann and Michael Saunders were the hawks. In the last few days, expectations of a 50 bps hike had grown.
The BoE said: "The scale, pace and timing of any further increases in Bank Rate will reflect the Committee's assessment of the economic outlook and inflationary pressures.
"The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response."
Sterling extended earlier losses after the announcement and by 1210 BST was trading down 0.9% against the dollar at 1.2065.
The Bank also said it expects inflation to rise "slightly above" 11% in October, when energy bills increase again. This is up from a previous forecast of 10% inflation. Bank staff now expect GDP to contract by 0.3% in the second quarter, weaker than anticipated at the time of the May report.
Earlier on Thursday, the Swiss National Bank unexpectedly lifted interest rates for the first time in 15 years.
The Bank lifted its policy rate from -0.75% to -0.25%, where it has been since 2015. It marked the first hike by the SNB since September 2007.
The SNB said: "The tighter monetary policy is aimed at preventing inflation from spreading more broadly to goods and services in Switzerland.
"It cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future to stabilise inflation in the range consistent with price stability over the medium term. To ensure appropriate monetary conditions, the SNB is also willing to be active in the foreign exchange market as necessary."
On Wednesday, the US Federal Reserve increased interest rates by 75 basis points - its biggest hike since 1994. Meanwhile, the European Central Bank indicated last week that it would lift rates in July in the face of surging inflation.
Laith Khalaf, head of investment analysis at AJ Bell, said: "The Bank of England is playing a game of slowly, slowly catchy inflation, rather than the shock and awe tactics being employed across the Atlantic. Despite the UK starting to tighten monetary policy first, interest rates are now higher in the US. Markets will no doubt seize on this as a sign the Bank of England has bottled it, but an incremental strategy allows the rate setting committee to observe more data as it comes in, and fine tune its approach as circumstances dictate.
"The US economy also has more long-term fixed mortgages than the UK, which makes interest rates across the pond a blunter policy tool, so the Fed has to create a bit of extra bang to have the same effect on a buck.
"No-one should labour under the misapprehension that interest rate rises are going to do anything about eye-watering levels of inflation in the short term. Our inflationary problem is being driven by a supply shock to energy markets stemming from the conflict in Ukraine, and the ensuing sanctions, and no number of interest rate rises will solve that problem. What the Bank is trying to do is head off second order inflationary effects becoming ingrained in the system and taking on a life of their own."
Paul Dales, chief UK economist at Capital Economics, said: "By raising interest rates by 25bps (basis points) today, from 1.00% to 1.25%, rather than by 50bps or the 75bps the Fed announced last night, we think the Bank of England is putting too much weight on the softening economy and not enough on surging inflation.
"It did hint it may yet raise rates faster in the coming months. But either way, we think the Bank will have to raise rates to 3.00%."
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