The Bank of England (BoE) was widely expected to raise rates at Thursday’s meeting, but the extent of the hike had the markets guessing right up to the rate announcement. This made for a dramatic meeting that sent the British pound swinging wildly against the US dollar.
It was a coin toss as to whether the BoE would raise rates by 25bps or 50 bps, with the markets pricing in the larger hike slightly above 50%. In the end, the BoE voted 7-2 to hike rates by 0.50%, with two dovish members voting to keep rates at 4.5%.
The BoE decided to press hard on the rate pedal after a very disappointing inflation report on Wednesday. Headline CPI remained stuck at 8.7% in May, and core CPI, which excludes volatile items and is a better gauge of inflation trends, climbed to 7.1% in May, up from 6.8% a month earlier. This marked the highest level for core CPI since 1992 and was a painful reminder that inflation remains persistently high.
The BOE has raised rates by a modest 0.25% over the past two meetings, but decided it needed to accelerate the pace of tightening to 0.50% due to the lack of progress in containing inflation. The BoE has circled inflation as its number one priority, but the rate-tightening campaign has not gone as well as expected and the BoE’s 2% target remains an elusive goal.
The BoE statement noted the rise in core CPI but added that headline CPI is expected to drop sharply during the year, due to a decline in energy prices. The statement reiterated the BoE’s commitment to the 2% inflation target, which the BoE expects to achieve in the medium term.
The FTSE 100 Index has declined by 0.94% and the British pound showed sharp swings after the rate decision.
The FTSE 100 Index was down by 71.48 points at 7487.70 on Thursday.
The British pound showed sharp volatility earlier but has stabilized. The GBP/USD currency pair opened at $1.2767 and spiked to a high of $1.2843 before reversing direction and dropping as low as $1.2727. GBP/USD has pared these losses and was trading at $1.2755 in the North American session.