- MPC surprises by raising rate benchmark to 5.0%

- Members Tenreyro, Dhingra vote for no hike 

- Governor Bailey says not trying to trigger a recession

- Investors bet on at least two further increases

By Harry Daniels   

LiveSquawk News   

@HarryDaniels71   

22 June 2022 | 15:00 GMT   

LONDON – Bank of England policymakers exceeded market expectations Thursday by lifting interest rates to a level last seen at the onset of the Global Financial Crisis in November 2008.

The bank’s Monetary Policy Committee voted 7-2 majority to raise its main rate by 50 basis points to 5.0%, with outgoing dissenter Silvana Tenreryo and Swati Dhingra voting to maintain the bank rate at 4.5%.  

The accompanying statement acknowledged that “there had been significant upside news in recent data that indicated more persistence in the inflation process,” a nod to Wednesday’s consumer price report. The bank added that this came “against the background of a tight labour market and continued resilience in demand.”

The surprise move had investors revising bets on the terminal rate. Swaps markets were pricing a 6.10% peak to the current cycle by early next 2024.

Nomura’s George Buckley observed that the word ‘forceful’ with respect to potential future hikes failed to reappear in the monetary policy summary, but said, “It’s worth noting that the MPC didn’t need it in the May decision to hike 50bp in June, as it turned out.”

Despite a significant majority of analysts suspecting the bank might move aggressively following the latest CPI figures, some argued that the move was likely to bring fresh pain for those with debts such as credit cards and mortgages.

“Following yesterday’s disappointing inflation figures, the members have also not ruled out the possibility of future rises – potentially squeezing consumers’ budgets much tighter,” posited Derrick Dunne, CEO of YOU Asset Management. “Despite the enormous pressure to bring down the persistently high inflation, the BoE knows that if it continues with too aggressive an approach, it could be on the hook for destabilising the economy.”

In an interview following the announcement, BoE Governor Andrew Bailey insisted the bank was not trying to trigger a recession. And there is an argument, albeit it softly spoken, suggesting that Thursday’s outsized move now gives the bank the space to view the effectiveness of past moves. The statement itself said, “The committee is continuing to monitor closely the impact of the significant increases in bank rate so far. As set out in the May report, the greater share of fixed-rate mortgages means that the full impact of the increase in bank rate to date will not be felt for some time.”

With fears the country maybe heading into a period of stagflation, some economists doubt whether we’ll see forceful hikes in the future.

ING’s James Smith and Chris Turner wrote, “We’re tempted to say that today’s 50bp move won’t become a new trend, but two further 25bp hikes seem like the most likely route after today’s meeting.”

This week marked the last meeting of external member and dove Tenreryo, who is set to be replaced by Megan Greene.

Nomura’s Buckley noted that August is a Monetary Policy Report meeting, where the MPC will reassess its forecasts. “That in itself presents a risk of another 50bp hike,” he said.

ING proffered that some of the recent stickiness in services inflation is a lagged impact of higher energy prices and that investors should see some of that ease off through the remainder of this year. “But it’s clear that until we begin to see some improvement in the official inflation statistics, the committee won’t be content with pausing.”