Bank of England with biggest rate hike in 27 years – Commerzbank

Economist at Commerzbank provide their afterthoughts on the latest Bank of England monetary policy decision, announced earlier this Thursday. The UK central bank announced the sixth rate hike in the current cycle and raised its key interest rate by 50 bps to 1.75%.

Key Quotes:

“The reason for the sharp hike is increasing inflationary pressure. According to the BoE, the labor market remains tight and domestic cost and price pressures are high. The central bank now forecasts inflation to peak at 13% in the fall. Inflation concerns obviously outweighed the economic slowdown – the BoE expects a recession in the UK from the fourth quarter.”

“The BoE would take the necessary decisions to bring inflation back to the 2% target, it said. In doing so, the Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.”

“In our assessment, the interest rate hikes so far have not been sufficient to get inflation under control. At 1.75%, the bank rate has probably not even reached the "neutral level" at which the economy is neither boosted nor dampened. We therefore continue to expect further interest rate hikes to 2.75% by early 2023. However, following the most recent sharp tightening and against the backdrop of the weaker economy, we believe it is likely that the next meeting in September will see another smaller step of 25 basis points.”