The nine-member Monetary Policy Committee voted 7-2 for an increase to 5 per cent, the highest level in 15 years and the biggest move since February. Markets had priced in only a 40 per cent chance of a half-point hike, with most economists anticipating a quarter point.
The pound swung between gains and losses and gilts gained after the decision as traders raised their expectations for further rate increases. The market is now pricing a 30 per cent chance the key rate will peak at 6.25 per cent by February, which implies another one-and-a-quarter point of hikes. The decision announced Thursday suggests U.K. borrowing costs could keep rising through the summer even after the U.S. Federal Reserve paused its tightening spree. Britain remains an outlier in the Group of Seven nations, with consumer prices rising 8.7 per cent in May, four times the BOE’s 2 per cent target and more than double the rate in the U.S.
“High inflation is a destabilizing force eating into pay checks and slowing growth,” Hunt said in a separate statement. The government’s resolve to bring down inflation “is watertight because it is the only long-term way to relieve pressure on families with mortgages.” It warned of “more persistence in the inflation process, against the background of a tight labor market and continued resilience in demand.”
The two dissenting voices on the BOE’s rate-setting committee were external members Silvana Tenreyro, in her last meeting, and Swati Dhingra. They argued that the existing rate rises have yet to impact the economy fully and falling energy prices will push inflation below target by the end of the forecast horizon.
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