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The Bank of England’s (BOE’s) monetary policy committee added another quarter of a percentage point to its prime rate, boosting it to 0.5 percent as the bank predicted the nation’s inflation rate will climb to 7.25 percent in April.
Four of the committee’s nine members pressed for a half-percent hike, which would have been the largest single jump in rates since at least 1997.
The minority vote “was a hawkish turn the market did not expect,” Fidelity International analyst Anna Stupnytska told the Financial Times.
The committee also voted to begin divesting the £895 billion (about $1.2 trillion) in bonds it has bought since 2011 to energize Britain’s economy.
Bond traders immediately began dumping gilt bonds. Yields on 10-year bonds added 0.11 percentage points to 1.36 percent
Bond yields rise as bond prices fall.
The committee acted shortly after the U.K.’s treasury department announced a new £9-billion initiative to help Brits cope with energy prices that have risen by 50 percent or more in recent months.
The climbing price of fuel has contributed to an inflation rate of 5.4 percent in December, the highest in 30 years and close to triple the bank’s 2-percent target.
The higher rate will slow Britain’s 2022 economic growth to about 1 percent and shrink disposable household incomes by 2 percent this year and another 0.5 percent in 2023, the bank said in a statement announcing the increase.
The bank sees “further modest tightening” of interest rates “in the coming months” to reach the BOE’s 2-percent inflation target, the statement added.
“We have not raised rates today because the economy is roaring away,” BOE governor Andrew Bailey told a 3 February press briefing.
“We face the risk that some of the higher imported inflation could become entrained within the domestic economy, leading to a longer period of high inflation,” he explained.
After the committee’s vote, futures traders began betting that the interest rate will reach 1 percent in May and 1.5 percent in November, a level not previously expected until March 2023.
TREND FORECAST: The U.K. is the Western nation’s interest rate raising model. At first the central bank and government deny they will raise rates, then they start raising them, and then the forecasts from the equity markets are that the interest rates will rise higher than expected.
And, the bottom line is: The higher the interest rates rise, the deeper the economy and equity markets will sink.