Aurelia Butler

Softening their forecasts of recession this year, the BoE’s nine interest rate-setters voted 7-2 to increase Bank Rate to 4.0% – its highest since 2008 – from 3.5%. MARKET REACTION:STOCKS: The FTSE 100 dipped initially before bouncing back, and was last up 0.6% on the day, compared with a gain of 0.5% before the decision. The mid-cap index jumped 2.1%.FOREX: Sterling briefly turned positive, but surrendered those gains and was last down 0.6% at $1.2298 and down 0.7% against the euro at 89.43 pence.BONDS: The yield on Britain’s 10-year government bond initially spiked but then fell below levels seen before the decision. It was last down 15 basis points to 3.156%.COMMENTS: DANIELE ANTONUCCI, CHIEF ECONOMIST, QUINTET PRIVATE BANK, LONDON:”There’s still some risk that the Bank could go for further interest rate rises if inflation news were unfavourable. After all, the Committee still sees risks to the inflation outlook as skewed to the upside.That said, today’s decision raises the possibility that the Bank rate may have already peaked or be close to peaking, undershooting the 4.5% level priced in by financial markets prior to this announcement.”WES MCCOY, SENIOR INVESTMENT DIRECTOR AT STANDARD LIFE INVESTMENTS, ABRDN: “When you read the commentary around it (rate hike) the Bank of England seemed more hawkish and still more concerned about inflation. The language around it was a 50 bps rise but also around that they still need to stay on the pressure against inflation. Whereas, the interpretation from the U.S overnight was there are reasons to step away from that pressure.”DEAN TURNER, CHIEF EUROZONE AND UK ECONOMIST, UBS GLOBAL WEALTH MANAGEMENT, LONDON: ‘As expected, today’s 50 basis-point hike was a split decision. It looks as though the appetite for further outsized hikes is fading but given the BoE’s revised outlook for growth and inflation, this hiking cycle is unlikely to be over just yet. We look for one further increase of 25 basis points in March which should mark the top of the cycle. Furthermore, we believe the door remains open for rate cuts before the year is out. PIOTR MATYS, SENIOR FX ANALYST, INTOUCH CAPITAL MARKETS, LONDON;”There seems to be a preference to sell sterling especially against the euro and investors adopted such a preference back in December when the BOE delivered a dovish 50 bps bike and on the same say President Lagarde sounded significantly more hawkish, and we may witness similar situation today.The outlook for the UK economy is still quite challenging compared to the euro zone and U.S., that is why GBP, after a knee-jerk reaction, resumed its decline.””The biggest risk to EURGBP today is if President Lagarde suddenly changes her tome and sounds far less hawkish following a widely expected 50 bps hike.”BEN LAIDLER, GLOBAL MARKETS STRATEGIST, ETORO, LONDON:”This is clearly the last big hike from the Bank of England, we’re on track for this rate cycle to finish in March or May.” “They’re very much following the Fed’s lead in getting rates to a high enough level where they’re comfortable waiting to see what happens.””They’ve got some quite aggressive assumptions though, and there’s uncertainty around them… They’re looking for a very sharp fall in inflation to 4% by the end of the year, from 10.5% now… so that remains to be seen. The initial spike (in the pound) is always the machines rather than the humans.”MICHAEL BROWN, MARKETS STRATEGY, TRADERX, LONDON:”The move in the pound was the vote split. I think market participants were expecting at least one to go for a more modest 25 basis points and that may have been one of the reasons why we saw cable come off.” “They dropped the ‘forcefully’ out of the language. That pretty much nails on the fact that March is probably going to be the last rate hike and, of course, the longer-run inflation forecasts have come quite sharply lower as well.””So it’s a bit more surprising in terms of votes – a bit more hawkish than we’d expected – but everything else is pretty much in line and mostly implying that the ‘Old Lady’ is very, very close to the end in terms of raising rates.”SIMON HARVEY, HEAD OF FX ANALYSIS, MONEX EUROPE, LONDON:”This is as straight down the line as you can get in terms of matching expectations from ahead of the meeting. They pretty much matched the market implied forecasts for rate increases, removed language saying they “will respond forcefully, as necessary” to signs of further inflation pressure and there was no increase in dovish dissenters.” (Two members of the rate-setting committee voted to keep rates on hold as expected)”“We think they will step down to 25 basis points in March, but the question is what tone of the press conference will be like, that’s where markets are really trying to suss out the underlying feel of how they are thinking about monetary policy.”JEREMY BATSTONE-CARR, EUROPEAN STRATEGIST AT RAYMOND JAMES INVESTMENT SERVICES, LONDON:”More noteworthy is the corresponding Monetary Policy Report, which has revealed that the Bank now expects a shorter and shallower recession – a far cry from the rather dire predictions of only a few weeks ago. “Yet for the Bank of England and the MPC, this good news is a wolf in sheep’s clothing. The economy’s unexpected resilience is keeping the inflationary fuel flowing, putting more pressure on the Bank to raise rates in its attempts to stem the flow. With the Bank’s upward revisions, the MPC may have to do the work they had hoped a lacklustre economy would achieve on its own.”MIKE COOP, CHIEF INVESTMENT OFFICER UK, MORNINGSTAR INVESTMENT MANAGEMENT, LONDON:”While the highest point of inflation is likely behind us, today’s rate rise shows that the year ahead will be a difficult one with the unusual cocktail of high inflation, rising rates and recession. Inflation outlook can change quickly and investors need to prepare portfolios for a range of inflation scenarios. The good news is that at current yields bonds are less sensitive to further rate rises, recession is cooling demand led inflationary pressures and gas prices have fallen sharply.” More

LONDON (Reuters) – The Bank of England raised interest rates for the 10th time in a row on Thursday but dropped its pledge to keep increasing them “forcefully” if needed and said inflation had probably peaked.Softening their forecasts of recession this year, the BoE’s nine interest rate-setters voted 7-2 to increase Bank Rate to 4.0% – its highest since 2008 – from 3.5%. The move had been expected by most investors and economists.The announcement comes a day after the U.S. Federal Reserve slowed the pace of its rate hikes with a smaller quarter-point move, but said it expected further increases would be needed.The European Central Bank looks set to raise rates by a half a percentage point later on Thursday to 2.5%.The BoE – which is trying to smother the risks from Britain’s 10% inflation rate without deepening the expected recession – said its run of rate hikes going back to December 2021 were likely to have an increasing impact on the economy.That should help to bring inflation down to about 4% by the end of this year, it said. Previously the BoE had forecast 2023 inflation at around 5%.”Since the November monetary policy report we’ve seen the first signs that inflation has turned the corner,” Governor Andrew Bailey said in a speech following the rate hike.”But it’s too soon to declare victory just yet, inflationary pressures are still there.” The UK central bank’s Monetary Police Committee (MPC) said further interest rate hikes would hinge on evidence of more persistent price pressures appearing.That represented a signal to investors that its sharp run of rate hikes might be coming to an end.Previously the BoE had said it would “respond forcefully, as necessary” to signs of further inflation pressure, and that “further increases in Bank Rate may be required”.The BoE sees inflation falling below its 2% target in the second quarter of 2024, but it warned there were upside risks to this forecast from persistent labour market pressures and higher-than-expected core and domestically generated inflation.After Thursday’s announcement, investors slightly trimmed their bets that interest rates would peak as high as 4.5%, in favour of an earlier halt at 4.25%, while sterling and British government bond yields moved lower after an initial spike.”With inflation projected to ease sharply, today’s 50-basis point-rise should be the last of this magnitude. If we do slide into recession, then policymakers may be forced to reverse policy sooner than many expect,” said Suren Thiru, economics director at ICAEW, a professional body for accountants.SHALLOWER RECESSIONThe central bank said Britain was still on course for a recession but it was likely to be “much shallower” than it feared in its last forecasts in November, thanks largely to a fall in energy prices as well as lower market rate expectations.Gross domestic product was now seen contracting by 0.5% in 2023 compared with the 1.5% shrinkage forecast in November and the recession would last five quarters – cutting output by less than 1% – rather than eight quarters.The BoE saw output shrinking in 2024 and barely growing in 2025, putting pressure on Prime Minister Rishi Sunak and his finance minister Jeremy Hunt, who has promised to set out measures to revive growth in a budget on March 15, ahead of a national election expected in late 2024.The BoE’s new GDP forecast was similar to one published this week by the International Monetary Fund which said Britain’s economy would shrink by 0.6% this year, while all the other Group of Seven nations were likely to grow. Britain has been hit hard by the surge in energy prices after Russia’s invasion of Ukraine as it relies heavily on gas for power generation. It has also suffered a fall in the size of its workforce that is believed to be linked to the coronavirus pandemic and post-Brexit restrictions on European Union workers.The BoE said Britain’s lack of workers, combined with low business investment and weak productivity growth, meant the economy could probably only grow by about 0.7% a year in the near term without generating inflationary heat.Before the pandemic, the potential growth rate was about 1.7% and Thursday’s downgrade represented a stricter speed limit on the economy, at least for the next couple of years while it recovers from the pandemic and the impact of Brexit.As a result, the BoE saw Britain’s economy still below its pre-pandemic size until after 2025, representing seven lost years for growth. More

The Bank of England has increased interest rates by half a percentage point to a 15-year high of 4 per cent, but suggested that rates may have reached their peak.The BoE, which is now anticipating a milder recession this year than previously thought, said further rises would only be needed if there were new signs that inflation was going to stay too high for too long. It dropped its previous guidance that it would need to act “forcefully”. The Monetary Policy Committee voted seven to two in favour of the 10th consecutive rate increase. “If there were to be evidence of more persistent [inflationary] pressures, then further tightening in monetary policy would be required,” the MPC said. That wording suggests interest rates might peak at the new rate of 4 per cent, lower than the 4.5 per cent expected by financial markets. Sterling weakened on Thursday, trading 0.45 per cent lower against the euro at €1.12 and 0.36 per cent lower against the dollar at $1.23.The yield on the 10-year gilt slipped 0.13 percentage points to 3.17 per cent as the price of the debt rose. London’s FTSE 100 was up 0.5 per cent just after noon.Explaining why the BoE raised rates even when it forecast inflation to fall well below target, governor Andrew Bailey said “we need to be absolutely sure we really are turning the corner on inflation”.There was no attempt by the BoE to suggest that financial markets were misguided in expecting interest rate cuts later this year. But MPC members cautioned “that the risks to inflation are skewed significantly to the upside”, which underpinned the majority’s continued concern about price rises and justified the large interest rate rise on Thursday.The BoE’s new central inflation forecast shows it thinks price rises will ease quickly from December’s 10.5 per cent annual rate to a level under 4 per cent by the end of the year. Inflation is forecast to drop well below the BoE’s 2 per cent target in 2024. The two dissenting voices on the MPC — Swati Dhingra and Silvana Tenreyro, who voted to leave interest rates at 3.5 per cent — believed that the BoE had already done enough and Thursday’s rise to 4 per cent “would bring forward the point at which recent rate increases would need to be reversed”. The BoE’s new economic forecasts were less pessimistic than its previous set of predictions in November, with the upgrade attributed to lower wholesale gas prices and a new assumption that companies will be reluctant to lay off employees during a difficult time for the economy. The central bank is now predicting a mild recession, with output falling 1 per cent from the peak in 2022 to a trough in 2024, with five quarters of gently falling output. While the government will be encouraged by the forecast upgrade, the BoE made it clear it thought the UK economic performance would be weak for some time. The growth forecast was still marginally more pessimistic than that of the IMF this week, with gross domestic product expected to contract 0.7 per cent in the fourth quarter of the year compared with the same period in 2022. The equivalent IMF forecast was for the economy to shrink 0.5 per cent. After looking at the likely supply of workers, low business investment and trade weakness, BoE officials think the UK economy cannot expand even at a 1 per cent annual rate without generating inflationary pressures.

Before the financial crisis of 2007-8, the equivalent sustainable average annual growth rate was 2.5 per cent, and before the coronavirus pandemic it was around 1.5 per cent. The BoE attributed the long-term underlying weakness of the economy to Brexit, the pandemic and the energy crisis. The BoE’s downgrade implies it expects the output to be no higher at the start of 2026 than it was just before the pandemic at the end of 2019. More