Reactions: Bank of England raises rates by most since 1995

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LONDON, Aug 4 (Reuters) – The Bank of England raised interest rates by the most in 27 years on Thursday, despite warning that a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13%.

Reeling from a surge in energy prices caused by Russia’s invasion of Ukraine, the BoE’s Monetary Policy Committee voted 8-1 for a half percentage point rise in Bank Rate to 1.75% – its highest level since late 2008 – from 1.25%. read more

MARKET REACTION:

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STOCKS: British stocks (.FTSE) extended gains after the central bank decision and were up nearly 0.5% on the day. Banking stocks (.FTNMX301010) jumped briefly before consolidating gains.

FOREX: The pound edged higher immediately after the rate decision but then turned lower on the day as the central bank said the economy will enter into a recession by the fourth quarter of 2022.

MONEY MARKETS: Interest rate markets were pricing in about 32 bps of rate hikes by September compared to 34 bps before the rate decision

COMMENTS:

JANET MUI, HEAD OF MARKET ANALYSIS, BREWIN DOLPHIN:

“The move is in line with the outsized rate increases other major central banks have done recently. Financial markets expect Bank rate to eventually peak at close to 3% sometime in 2023, so there is some way to go before the Bank pause.

“With the forthcoming jumbo increases in energy bills and further tightening in financial conditions for some households and corporates, the cost of living crisis will be a burning policy issue for the contenders of the next Prime Minister.”

SAM COOPER, VICE PRESIDENT, MARKET RISK SOLUTIONS, SILICON VALLEY BANK:

“No surprise in the headline decision to hike the interest rate by a 0.50% increment. However, the bleak outlook for GDP and rising inflation forecasts included in the meeting minutes have dampened market confidence and this has translated into a weaker sterling.”

STUART COLE, HEAD MACRO ECONOMIST, EQUITI CAPITAL:

“What I think is very telling is that the forecast for inflation for end 2023 is higher than CPI is at the moment. It is hard not to see more 50bps hikes being delivered given that fact.”

“Add onto that the upwards revision to CPI, which is now seen peaking at 13.3% and remaining elevated throughout next year, and it all points to a tough policy dilemma for the BoE going forward.”

PAUL CRAIG, PORTFOLIO MANAGER, QUILTER INVESTORS, LONDON:

“In the back of the mind of policy makers will be the current public mood. Sentiment is shifting against the Bank of England with a recent survey pointing to more people being dissatisfied with the job it is doing than satisfied people.

“The other significant shift from the BoE in recent weeks was the dropping of mortgage affordability rules. With the economic picture looking incredibly challenging, and mortgage rates subsequently rising off the back of the BoE’s moves, the decision to drop those rules is looking more and more circumspect by the day. There is a concern the lessons of 2008 are beginning to be forgotten.”

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Reporting by the London Markets and Finance Team; Compiled by Saikat Chatterjee; Editing by Toby Chopra

Our Standards: The Thomson Reuters Trust Principles.

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