The Bank of England (BoE) was widely expected to deliver a 14th consecutive rate hike at today's meeting. Still, the money markets were split on the extent of the increase. Ahead of the meeting, there was a 60% probability of a 25-basis point (bps) hike and a 40% chance of a 50-bps increase. The Monetary Policy Committee (MPC) voted 6-3 in favor of a 25-bps increase – two members favored a 50-bps hike, and one voted to keep the rate unchanged.
The MPC struck a hawkish tone in its monetary policy summary, stating that the MPC would “ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target.” This signals that the BoE is prepared to continue raising rates for as long as necessary until inflation is beaten.
At today’s meeting, the BoE revised its inflation forecast to 4.9% by the end of the year. This is slightly lower than the May forecast of 5.0%. Inflation is heading in the right direction, but the decline has been slow - inflation dropped to 7.9% in June, down from 8.7%. There is little doubt that the BoE will have to continue tightening until inflation is much closer to the 2% target.
BoE Governor Bailey tried to paint a positive picture at his follow-up press conference, saying that inflation was falling and that he expected inflation to drop to around 7% in July and 5% in October. Bailey noted that higher rates worked to curb inflation, and policy must remain restrictive.
The FTSE 100 has declined by 0.83%, and the British Pound has edged lower after the BoE decision.
The FTSE is down 62.56 points (0.84%) at 7497.65 on Thursday.
The GBP/USD currency pair declined by 0.44% on Thursday. GBP/USD opened at $1.2710 and rose slightly to $1.2728 before reversing direction and dropping as low as $1.2620. GBP/USD has pared some of these losses and is trading at $1.2649 in the European session.