Thursday, December 16, 2021
Reaction to severe inflation
British central bank initiates interest rate turnaround
The Bank of England surprises the markets with a rate hike. The reason: inflation in the UK is higher than it has been in ten years. Any uncertainties caused by the new Omikron variant are not preventing the central bankers from taking this step.
The Bank of England (BoE) is the first of the major central banks worldwide to increase interest rates since the outbreak of the corona pandemic. The key monetary policy rate was surprisingly raised from 0.1 percent to 0.25. The monetary authorities are reacting to the rapid rise in prices on the island. At last 5.1 percent, inflation has shot far beyond the central bank’s target and has reached its highest level in ten years.
Most economists expect inflation to continue to rise in the coming months before falling again in the second half of 2022. The prices are driven, among other things, by the sharp rise in energy costs as well as the shortage of materials and delivery bottlenecks resulting from the pandemic crisis. These factors are also fueling inflation in the US, so that the US Federal Reserve is considering several rate hikes for next year.
The decision in the Monetary Policy Council was made with a majority of 8 to 1 votes. In November the markets had already firmly assumed a 15 basis point rate hike in London, but were disappointed at the time. Many experts had now expected that the uncertainty about the Omikron variant would make the majority of BoE council members hesitate again to raise the key rate.
The British pound meanwhile acknowledged the current rate hike with significant gains against the dollar and the euro. British government bonds, on the other hand, came under pressure. UK stocks lost some of their previous gains.