The Bank of England raises interest rates, but is unlikely to move any further down the rate-hiking path

At its recent meeting, the Bank of England raised its key interest rate for the second time since the outbreak of the financial crisis in 2007 – by 25 bp to 0.75%. Admittedly, the tightening step did not come as all that much of a surprise – after all, the probability of a rate hike priced in by money markets was already higher than 90% ahead of the meeting. On the other hand, the unanimous nature of the vote – the members of the Monetary Policy Committee voted 9:0 to lift the key interest rate – was relatively unexpected. It would appear that even Jon Cunliffe, who is regarded as a monetary-policy dove, has come round to regarding a more restrictive stance as being appropriate.

On the back of the positive sentiment deriving from the unanimous vote, sterling managed to gain altitude briefly against the euro. However, the brighter mood did not last particularly long. It would seem that the majority of market participants had been hoping that the Governor of the BoE would make a clearer commitment to a further tightening step in the foreseeable future. Instead, the BoE kept to its line that further “limited and gradual rate increases over time” were the right course of action.

Once again, the Bank of England made it clear that its monetary-policy stance and policy forecasts are based on a “relatively smooth“ transition scenario governing the United Kingdom’s exit from the European Union. But the BoE likewise made it clear that it is ready for all possible Brexit outcomes and recognises that the economic outlook could change significantly as a result. In the view of the monetary custodians, talks between Brussels and London have reached a “critical phase“ – undoubtedly a friendly paraphrase for the situation in view of the extent of the existing differences in views and of how few months are left until the deadline arrives.

Judging by the – on the whole – cautious statements by the BoE’s top policymakers, a further key-rate hike at the next MPC meeting in September is definitely not on the agenda. What is more, the shape of the rate-hike trajectory going forward will probably hinge to a very significant extent on the future course – and outcome – of the Brexit negotiations. It is true that there should be more clarity about the terms of the UK’s exit from the EU by the time the MPC meets in November and December; today’s wisdom suggests, however, that a further key-rate hike any time soon looks highly doubtful.

Rate this article


Thank you for your rating. Your vote:
There is no rating yet. Be the first! Current average rating: 0

Leave an answer

Your e-mail address will not be published. Required fields are marked *