Bank of England hikes rates for the fifth time in a row as inflation soars - CNBC

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Bank of England Governor Andrew Bailey has said he is not at all happy with rising inflation, but that the central bank couldn't have done anything differently to avoid it.

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LONDON — The Bank of England on Thursday implemented a fifth consecutive hike to interest rates as it looks to rein in soaring inflation.

The Monetary Policy Committee voted 6-3 to increase the Bank Rate by 25 basis points to 1.25%, with the three dissenting members voting for a 50 basis point hike to 1.5%.

The committee said in a statement Thursday that it will "take the actions necessary to return inflation to the 2% target sustainably in the medium term," with the the scale, pace and timing of any further hikes depending on the economic outlook and inflationary pressures.

"The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response," the bank added.

The pound dropped against the dollar shortly after the announcement, but rebounded to gain 0.4% and trade above the $1.22 handle by mid-afternoon.

Policymakers face the unenviable task of bringing consumer prices back under control against a backdrop of slowing growth and a rapidly depreciating currency, while the U.K. faces a major cost of living crisis.

At its May meeting, the Bank raised its base rate by 25 basis points to 1%, its highest level for 13 years, but warned that the British economy risks falling into recession.

Since then, fresh data has shown that U.K. inflation soared to a 40-year high of 9% annually in April as food and energy prices spiraled. The Bank now expects inflation to rise to "slightly above 11%" in October, reflecting higher projected household energy prices following an expected further increase to the U.K. energy price cap.

Inflation is surging worldwide due to spiking costs of food and energy, which have been exacerbated by the war in Ukraine and supply fears in agricultural commodities. Supply chain disruptions and demand shifts as a result of the pandemic have also driven up tradable goods prices.

However, in its statement Thursday, the MPC acknowledged that not all of the excess inflationary pressure can be chalked up to global events, noting that domestic factors such as a tight labor market and the pricing strategies of firms have also played a role.

"Consumer services price inflation, which is more influenced by domestic costs than goods price inflation, has strengthened in recent months. In addition, core consumer goods price inflation is higher in the United Kingdom than in the euro area and in the United States," the Bank said.

The economy unexpectedly shrank by 0.3% in April after a 0.1% contraction in March, the first back-to-back declines since April and March 2020, and the OECD has forecast that the U.K. will be the weakest G-7 economy next year as higher interest rates, tax rises, reduced trade and spiraling food and energy prices hammer households.

The Bank of England's move deviated from the more aggressive actions of the U.S. Federal Reserve on Wednesday and the Swiss National Bank earlier on Thursday. The Fed imposed a 75 basis point hike, its largest since 1994, while the SNB hiked by 50 basis points, which was more than the market expected.

A 'case study' for central banks

Vivek Paul, U.K. chief investment strategist at BlackRock Investment Institute, noted that the Bank of England was the earliest of its peers to begin the process of monetary policy normalization, and is now further along the tightening path while facing the most acute risks to near-term growth. This means it could serve as a "case study" for how central banks worldwide will react as recession risks rise.

"We think market expectations of future U.K. rates will ultimately prove to be overdone. According to the Bank's own figures, recession is a genuine risk – and recent government initiatives to alleviate the cost-of-living crisis may prove insufficient to offset U.K. consumer weakness," Paul said.

"Ultimately, the Bank has less headroom for hikes compared to the U.S.: the neutral rate of interest – that which neither overly stimulates nor restricts economic growth – is lower, and the country's high debt-to-GDP ratio implies greater sensitivity of debt servicing costs to rate rises."

Karen Ward, chief market strategist for EMEA at JPMorgan Asset Management, said that with rising gas prices continuing to put upward pressure on consumer prices this year, all the bank could do on Thursday was "send a clear message" to other price setters in the economy that 10% price increases are not "an acceptable new normal."

"It had to show it hasn't gone soft on inflation, or in economic-speak to anchor inflation expectations," Ward said.

"In our view, a 50 basis point hike would more appropriately have sent that signal. It's possible that by acting cautiously today, it may have to deliver more further down the line."

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Bank of England hikes rates for the fifth time in a row as inflation soars - CNBC
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