FTSE 100 ended roughly flat on Thursday even though the Bank of England announced its biggest rate hike since 1995.
Key rate raised to 1.75%
Governor Andrew Bailey lifted rates by 50 basis points this morning to fight inflation that hit a new forty-year high of 9.40% in June. Defending the sixth consecutive rate hike that sent the key rate to 1.75%, he said on a CNBC interview:
This rise in energy prices has exacerbated the fall in real incomes. We’re facing a very big shock to inflation. Our action today was very, very clearly [that] we feel we’ve got to take stronger action.
More alarmingly, BOE now warns the CPI could top 13% in October as the effects of the Ukraine war continue to reflect in the food and energy prices. Its previous forecast was a peak at 11%.
What to expect in September?
Against a rather challenging macroeconomic backdrop, U.K.’s blue-chip index is down only 1.0% versus the start of 2022, which is particularly interesting considering the Bank of England anticipated inflation to remain elevated through much of 2023.
Bailey agrees that higher rates are taking a toll on the GDP and expects the economy to plunge into a recession in the final quarter of 2022. Still, Matthew Ryan – Head of Market Strategy at Ebury does not see the central bank turning any less hawkish in the near-term.
The priority for now clearly remains focused on controlling inflation at the expense of growth. This indicates that another 50-bps rate hike is possible at the next MPC meeting in September, depending on economic data in the interim.
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