The Bank of England slashed interest rates as coronavirus hit in 2020.
- The Bank of England hiked borrowing costs Thursday, taking its main interest rate from 0.1% to 0.25%.
- BoE officials are trying to tame strong UK inflation, which surged to a 10-year high in November.
- The move came after the Federal Reserve announced a more aggressive approach to inflation Wednesday.
The Bank of England hiked interest rates for the first time since 2018 on Thursday, as it tries to tame the strongest inflation in 10 years.
Britain's central bank raised its main interest rate from a record low of 0.1% to 0.25%, making it more expensive to borrow in an effort to cool strong demand in the economy.
The BoE took economists by surprise with its move. They had expected policymakers to hold rates steady, given the uncertainties about the impact of the Omicron coronavirus variant, although traders were less certain.
In the event, the BoE's monetary policy committee voted 8-1 to raise, becoming the first major central bank to hike rates since the coronavirus pandemic began.
Like other advanced economies, the UK is grappling with hefty price rises after the economic shock of 2020. Suppliers are struggling to keep up with robust consumer demand, which has pushed up the prices of goods from gasoline to clothing.
Inflation hit a decade high of 5.1% year-on-year in November, data released Wednesday showed.
The BoE said it now expects inflation to remain around 5% in the winter, and peak at 6% in the spring of 2022, even with the interest-rate rise factored in.
The pound spiked after the decision and was last 0.78% higher at $1.337, with the prospect of higher returns making the UK economy look more attractive to investors. The FTSE 100 stock index dipped slightly, but was last up 1.03%.
Addressing the Omicron variant, the BoE said the impact of the virus would probably drag on the UK economy over the coming months.
Yet it said that Omicron's "effects on demand and supply, and hence on medium-term global inflationary pressures, is unclear."
While there are signs that the effect of the highly mutated virus on patients may be mild, it has proved significantly more transmissible than the Delta variant already in circulation.
Many analysts expressed surprise at the BoE's rate decision, given the economic risks from Omicron.
Prime Minister Boris Johnson's government is bringing in new restrictions — although they so far fall well short of another lockdown — and has estimated that Omicron cases are likely running at 200,000 a day. On Thursday, France banned all non-essential travel from the UK.
"The 8-1 vote to raise rates is fairly surprising, given the emergence of the Omicron variant and uncertainty over the near-term growth impact," said Hussain Mehdi, macro strategist at HSBC Asset Management.
Yet others said it was the right move, especially when considering the strength of the labor market.
"Given the inflation and labor market conditions, it is understandable that the committee saw it no longer appropriate for its policy rate to be at just 0.1%," Hugh Gimber, global market strategist at JPMorgan Asset Management, said.
Gimber said that further rate hikes are likely to follow in 2022, so long as coronavirus doesn't whack the economy.
On Wednesday, the US Federal Reserve accelerated the pace at which it will wind down its own bond-buying package, and signaled that interest rates are likely to rise next year. The move came after US inflation rose 6.8% year-on-year in November, the strongest figure in almost 40 years.
The BoE's 895 billion pound ($1.31 trillion) bond-buying package is also due to come to an end this week.
By: [email protected] (Harry Robertson)
Title: The Bank of England just hiked interest rates in a bid to tame decade-high inflation
Sourced From: markets.businessinsider.com/news/bonds/bank-of-england-interest-rates-inflation-omicron-uk-economy-2021-12
Published Date: Thu, 16 Dec 2021 13:05:56 +0000
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