ALBAWABA – In response to surprising May inflation data in the United Kingdom (UK), the Bank of England announced a 0.5 percent hike on the benchmark UK interest rate, bringing it to 5 percent, Thursday.
Meanwhile, an official statement, carried by Bloomberg, warned that this may not be the only UK interest rate in the coming months.
Markets were taken by surprise, as traders and economists have anticipated a quarter point increase, according to the New York-based news agency.
Policymakers, led by Governor Andrew Bailey, said nothing to rein in market expectations for rates peaking around 6 percent by the end of 2023 or beginning of 2024.
A 6 percent UK interest rate would be the highest the country has seen in more than two decades.
“The economy is doing better than expected, but inflation is still too high and we’ve got to deal with it,” Bailey said.
“We know this is hard – many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later.”
The pound swung between gains and losses and gilts gained after the decision as traders raised their expectations for further rate increases, as reported by Bloomberg.
The market is now pricing a 30 percent chance the key rate will peak at 6.25 percent by February 2024, which implies another one-and-a-quarter point increase.
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” Bailey wrote in a letter to Chancellor of the Exchequer Jeremy Hunt.
He added: “The MPC will do what is necessary to return inflation to the 2 percent target.”
The MPC is the Monetary Policy Committee at the Bank of England, the UK’s central bank.
In his response, Hunt said that “high inflation is the greatest immediate economic challenge that we must address,” and that the central bank has the government’s “full support”, Bloomberg reported.
The decision announced Thursday suggests UK borrowing costs could keep rising through the summer even after the United States (US) Federal Reserve paused rate hikes for June.
Britain remains an outlier in the Group of Seven nations, with consumer prices rising 8.7 percent in May. Noting that this rate is four times the central bank’s target of 2 percent, and more than double the rate in the US.
