The Bank of England announced on Thursday a new increase in the interest rate. It raised the key rate by 25 basis points to 1.25%, with three members voting for a 50 bps hike. Analysts from Rabobank expect one more 25 bps hike in August, before the Monetary Policy Committee (MPC) takes a pause and re-assesses.
Key Quotes:
“With GDP set to contract this quarter, the MPC is hiking into a slowdown. It risks inflicting a deeper recession on the economy; bringing down inflation creates a lot of collateral damage.”
“We expect one more 25 bps hike in August, before the MPC takes a pause and re-assesses. The risk is that the market will not allow the central bank to pause. In an environment where almost all other central banks are ramping up their hiking schedules, and where countries want stronger instead of weaker currencies in order to fend off imported inflation, the value of the currency increasingly becomes a risk factor.”
“The sterling effective exchange rate has fallen by 5% year-todate, with particular weakness against the US dollar. This could not only be attributed to a weakening growth and political outlook, but also to widening interest rate differentials with the United States. This places the central bank in a perilous spot: if it does too little, imported cost pressures keep flowing in, if it does too much, it will only intensify the recession.”