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Wednesday, November 30, 2022

Bank of England executes its biggest rate hike in 33 years: raising them by 75 basis points to 3%

The Bank of England (BoE) does not want to lag behind other central banks such as the US Federal Reserve or the European Central Bank and this Thursday decided to raise interest rates by 75 basis points to 3%, highest since 2008, This is BoE’s eighth consecutive rate hike since its meeting last December, with a cumulative increase of 290 basis points. Today’s hike is the bank’s biggest one-time hike since October 1989 (up 113 basis points at the time).

The decision to approve an increase of this caliber has been supported by the bulk of the Monetary Policy Committee. Of the nine members that made it up, Seven voted in favor of this increase, one for an increase of 50 basis points and the other for an increase of 25 basis points. The body is divided like other occasions, which undermines the determination made.

The growth is in line with market expectations and exceeded expectations of some analysts, who were considering growth of 50 basis points given the uncertain horizons of the British economy. Despite matching with market bets, pound sterling It fell over 1.8% to lose $1.12. sovereign bond (gold water) One 10 years It has increased from 3.41% to 3.53%.

Despite a significant increase in rates, the tone of the BoE has not been the same, as previously assessed by analysts flamboyant How can he ‘telegraph’ this figure. In fact, the agency’s statement accompanying its decision today said that “the maximum interest rate will likely be lower than the markets,” stating that, if rates are raised to that level, the size of the economy will shrink. Will be around 3 percentage points in several quarters.

Governor Andrew Bailey He has emphasized this point in the subsequent press conference. Recently Lieutenant Governor Ben Broadbent did the same. Market bets have dampened expectations terminal type most of this cycle Al 4,7% until November 2023. “It is quite unusual for a central bank to talk directly about market rate expectations,” says Axel Botte, global strategist at Ostrom AM. For the expert, the increase of 75 basis points “has been as moderate as it could have been.”

The economy has been subject to succession tremors Very important”, BoE officials acknowledged in the statement accompanying the decision. “Labor market tensions remain high and there are continued signs of strong inflation in home prices and wages that may indicate greater persistence,” they point out.

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A majority of the committee is of the view that “a further increase in the bank interest rate may be necessary for inflation to return to target in a sustainable manner, albeit at a lower-than-expected maximum level in financial markets.” The latest CPI data was up 10.1% year-on-year relative to September. Similarly, British unemployment is at a 1974 low, largely due to departures from the workforce, especially post-Covid illness. This adds to the wage pressure and the fear of the BoE. The central bank insisted it would “respond vigorously” if necessary. Despite this adverb, analysts are left with a feeling dovisho outgoing.

In this meeting, BoE has once again updated its macro forecast, the last ones are in August. The agency acknowledges that, in the meantime, in the context of changes in government, there have been several fiscal changes due to the chaos in the markets of tax cuts made by the former. Chieftain Liz Truss.

In recent days, analysts have shown that the central bank was ‘shooting indiscriminately’ with these forecasts, as the new government of Rishi Sunak has delayed. November 17 Its medium-term financial plan, which makes the agency’s calculations difficult. Bailey himself remains in his presence: “The policy of the United Kingdom has been questioned. It will have a lasting effect. We will have to work very hard to leave it behind.”

In the absence of new numbers, the BoE’s view is that GDP decreased by about 0.75% During the second half of 2022, “partly as a result of a decrease in real income due to an increase in world prices for energy and tradable goods”. according to inflationexpected to grow About 11% in the fourth quarter of 2022, lower than expected in August (13%).

ING: “We’re looking to increase by 50 basis points in December”

In the committee’s central launch this November, which is conditioned on the higher trajectory of market interest rates, it is expected that GDP continues to decline in the first half of 2023 (-1.9%) and 2024 (-0.1% at year-end)Higher energy prices and tighter financial conditions weigh on spending. In this forecast, the CPI begins to decline from the beginning of the following year, as previous increases in energy prices disappear from the annual comparison.

“Domestic inflationary pressures remain strong in the coming quarters and then subside. Huge fall in CPI Fall below the 2% target within two years (1.4% in 2024), and even below the target (0% in 2025) within three years,” the officials said.

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“In upcoming meetings, the BoE will have to increase rates aggressively to protect the pound or proceed more cautiously to allow mortgage rates to be reduced gradually. With only about a third of the UK mortgaged In two years, we suspect the latter option will be seen as increasingly acceptable. Moderated messages Those visible in today’s statement and forecast are a clear indication of this. We are seeing a 50 basis point increase in the rate in December and we think the bank rate is unlikely to rise above 4% next year,” said James Smith, an analyst at ING.

A ‘Cursed’ Autumn

This Thursday’s appointment follows a ‘cursed’ start of autumn in the United Kingdom that has left the central bank ‘at the sight of a storm’. On September 22, the central bank decided to hike for the second successive 50 basis points till it leaves Reference rate at 2.25%, This was the seventh consecutive increase from 0.1% which was in November 2021. A part of the committee (three members again) advocated an increase of 75 basis points in the face of inflation that flirts with 10%. Meanwhile, there has been ‘one world’.

Just a day after the BoE decision in September, the new and brand new executive of the conservative liz truss caused an ‘earthquake’ in the markets when its treasurer’s chancellor, semi quarteng, displayed a mini-budget with tax cuts of up to £45bn per year. Problem? There was no financing plan, with Downing Street hoping for development to do it all. Pound fell, on yield gilts (British Sovereign Bond) increased and everything else is well known.

A pulse arose in which Downing Street indirectly squeezed the BoE, which was to uphold its mandate of independence. Beyond the emergency intervention of the bond-buying bank when its forecast was to sell them (it started this Tuesday), the persistence of its governor, Australian Andrew BaileyWith the bond purchase deadline (two weeks), the truce dealt the final blow to the government. The required fiscal return ended with the brief Prime Minister and gave way to the new government. Tory of Rishi Sunak, The incoming cabinet is studying tax hikes and spending cuts to cover the huge fiscal hole.

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