The Bank of England has hiked interest rates by 50 basis points – its largest increase in 27 years – while becoming more pessimistic over the health of the UK economy. 
The Monetary Policy Committee voted to increase the base rate from 1.25% to 1.75% in its latest attempt to get to grips with soaring inflation, which stands at a 40-year high of 9.4%.
The decision was near-unanimous: eight of the committee’s nine members were in favour. The ninth - professor Silvana Tenreyro from the London School of Economics - voted for a 25 basis point rise to 1.5%.
A 50 basis point hike was last carried out by the Bank in 1995.
UK base rate over 10yrs
Source: Bank of England
The Bank is now expecting inflation to climb to just over 13% in the fourth quarter of 2022, then to remain at “very elevated levels” throughout much of 2024 before falling to its 2% target two years ahead.
Seema Shah, chief strategist at Principal Global Investors, said: “The largest hike in 27 years is the minimum action required by the Bank of England at this stage. With inflation set to hit 13% later this year and set to remain stubbornly high through next year, the central bank needs to tighten policy at an accelerated pace.
“Indeed, with other developed market central banks already hiking by 50 basis points or more, it’s a wonder that the Bank of England had been steadfastly sticking to 25 basis point hikes for so long.”
However, Shah added that policy tightening “will inevitably take its toll on the UK economy” – a point that the MPC made when announcing today’s rate hike.
“GDP growth in the United Kingdom is slowing. The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe,” the committee said.
“The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.”
While the 50 basis point increase was expected by the market, Validus Risk Management head of interest rates Shane O’Neill pointed out that the consensus was for two dissenters on the MPC. The fact there was only one could be seen as being a more hawkish stance than expected and might signal more aggressive hikes to come.
“The caveat to this is that the BoE have become significantly more pessimistic about the state of the economy, predicting a recession that starts in Q4 this year and lasts through 2023. Not just a technical recession but a drop in output of 2.1, the worst performance for the economy since the global financial crash should it come to pass,” he added.
CPI inflation over 10yrs
Source: Office for National Statistics
Tim Graf, head of EMEA macro strategy at State Street, agreed that the Bank of England did not surprise many people with its hike, but there may be some shock at what it said.
“Forecasting a deep and lasting recession coupled with such a sharp rise in rates is a bold step, confirming that the priority remains getting inflation and inflation expectations under control, regardless of the cost,” he said.
“We expect the 50 basis point hike fully priced for the September meeting will be delivered and have little reason to doubt the forecasts of a pronounced slump in activity later this year. GBP remains a currency we favour selling on any rallies.”
Hugh Gimber, global market strategist at JP Morgan Asset Management, finished: “Looking ahead, policymakers are clearly keen to create some wiggle room in the future path of policy. The monetary policy committee members themselves describe the risks around their own projections as exceptionally large, and in this context, it would make no sense for the Bank to try and steer neither the market nor consumers on the pace of tightening ahead.”