BOE raises rates to 5.25% with warning policy will remain tight

BLOOMBERG

The Bank of England (BOE) raised interest rates to a new 15-year high, warning that its fight against inflation may require tighter borrowing conditions for a prolonged period.

The UK central bank lifted its key rate a quarter point to 5.25%, a smaller hike than the half-point increase delivered in June. Investors and economists had expected the move and have priced in further increases this year.
The pound initially extended losses after the decision and short-dated gilts gained as traders pared bets on further interest-rate hikes.
Policy makers led by Governor Andrew Bailey left the door open to further action if inflation persists and added language saying their stance will remain “sufficiently restrictive for sufficiently long” to bring it back to the 2% target.
The bank cut its forecast for growth over the next two years and raised its outlook for inflation over the medium term, signalling a bleak backdrop for the next general election, which must be held by early 2025. Prime Minister Rishi Sunak has so far backed the bank in it’s fight against inflation, making halving the rate of price increases one of his five key pledges this year.
The decision indicated a growing division on the nine-member Monetary Policy Committee about how the BOE should respond to indicators showing that wages and prices are rising too fast for comfort while activity in the economy is weakening.
Catherine Mann and Jonathan Haskel voted for a half-point hike. Swati Dhingra sought no change. The remaining six including Bailey and his deputies were in the majority and noted that their action will weigh heavily on households and businesses.
“Inflation is falling, and that’s good news,” Bailey said in a statement released by the BOE. “We know that inflation hits the least well off hardest, and we need to make absolutely sure that it falls all the way back to the 2% target.”
The BOE maintained its guidance that “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” minutes of the meeting showed.
It added a sentence suggesting that once the tightening cycle is finished, rates may remain elevated for some time.
“The MPC would ensure that Bank Rate was sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with its remit.”
Key indicators, especially wage growth, “suggest that some of the risks from more persistent inflationary pressures may have begun to crystalise.” Money-market traders now see the BOE’s key rate peaking below 5.75% by February, down from as high as 5.85% before the decision. The move was spurred by the division on the MPC about the appropriate policy response. Some traders who were holding out for a bigger half-point hike were also caught off guard.