The Bank of England raises rates for the third consecutive time

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The Bank of England raises rates for the third consecutive time

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LONDON, ENGLAND – FEBRUARY 03: Bank of England Governor Andrew Bailey leaves after a press conference at the Bank of England on February 3, 2022 in London, England.

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LONDON – The Bank of England raised interest rates for the third consecutive meeting on Thursday, but adopted a more dovish tone as the Russia-Ukraine conflict is expected to keep inflation higher for longer.

The Bank’s Monetary Policy Committee voted 8-1 in favor of a further 0.25 percentage point increase in the main exchange rate to 0.75%.

Inflation in the UK was already at a high of the last 30 years before the Russian invasion of Ukraine, which pushed energy prices up and will put more upward pressure on the central bank’s inflationary projections.

At its last meeting in February, the Monetary Policy Committee imposed consecutive interest rate hikes for the first time since 2004 and raised its inflation forecast to a peak of 7.25% in April amidst a strong environment. growth and a robust UK labor market

The Bank said at the time that any further tightening of monetary policy would hinge on medium-term inflation prospects, which were then pushed up by Moscow’s assault on Ukraine and subsequent threats to energy supplies.

Bilateral risks

“Global inflationary pressures will further strengthen in the coming months as growth in economies that are net energy importers, including the UK, is likely to slow down,” the Bank said in Thursday’s report.

The Bank now expects a further increase in inflation in the coming months to around 8% in the second quarter of 2022, and possibly even higher over the course of the year.

Given the rigidity of the labor market and persistent internal cost and price pressures, the MPC also said that “a further modest tightening of monetary policy may be appropriate in the coming months”, although the risks are bilateral depending on the trend of averages – forward inflation prospects.

The pound retreated after the announcement, losing 0.3% against the dollar, while the euro gained around 0.5% against the pound.

Double-digit inflation “not off the cards”

Paul Craig, portfolio manager at Quilter Investors, said in reaction to the Bank’s higher inflation projections that it now appears “in the end a double-digit inflation rate is not off the cards.”

“The BoE has had no choice but to keep raising rates. Now it’s looking to build some insurance in the event of a slowdown in economic growth or worse-than-feared employment,” Craig said.

“With global risks and the Russia-Ukraine war having a significant economic impact, growth will be strained and therefore the Bank may have to reverse course later in the year.”

For now, however, Craig suggests the Bank will need to continue its tightening path to prevent further devaluation of the pound, which would exacerbate the cost-of-living crisis gripping British households.

“Savings rates could improve from here, which could offset some of the cost of living crisis, but with inflation proving difficult to contain, it could all be a little too late,” he added.

Vivek Paul, the UK’s chief investment strategist at the BlackRock Investment Institute, said normalizing policy rates to pre-pandemic levels and ending quantitative easing made sense, with the country’s strong economic rebound showing that they are no longer further stimulation needed.

The UK economy grew 7.5% in 2021, making up for much of the contraction of the pandemic era.

“However, headwinds caused by the war in Ukraine, including significantly higher energy prices, could slow the momentum of the economy by the end of the year,” said Paul.

“With yesterday’s market expectations for the base rate close to 2.2% by the end of the year – higher even than before the start of the war in Ukraine – the markets are betting that the Bank’s rate path from here it will be extremely aggressive in the short term. “

Although BlackRock sees more tightening over the next few years, Paul suggests there is “excessive aggression” in most developed markets, as an overly aggressive hike by central banks would take a heavy toll on growth.

“Current market prices indicate an early loading of rate hikes followed by a series of cuts, illustrating the risk of excessive tightening,” said Paul.

“Clear communication will be essential, in our opinion, for the Bank to avoid creating confusion due to the excessive tightening of financial conditions and damage to the real economy”.

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