Bank of England vows to beat inflation, offers no new boost to sterling
(Reuters) - The Bank of England raised interest rates on Thursday and repeated its pledge to bring down the fastest inflation of any major economy, offering little fresh incentive to currency traders to boost the pound.
The central bank said the economic backdrop was healthier and it no longer expects a recession, but inflation is taking longer to fall than it had hoped, mostly due to unexpectedly big and persistent rises in food prices.
The pound fell against the dollar . UK blue-chip stocks surrendered earlier gains and government bonds pared back price rises.
BoE Governor Andrew Bailey said inflation should halve by the end of this year from its current level of 10.1%, but was still too high and, as such, policymakers must stay the course to bring it back to the 2% target.
GRAPHIC: Bank of England raises rates for 12th time in a row https://www.reuters.com/graphics/BRITAIN-BOE/dwpkdnjgzvm/chart.png
STOCKS: The FTSE 100 dropped 0.4%, partly due to declines in banking stocks, having shown a 0.1% gain on the day prior to the decision.
FOREX: Sterling was down 0.3% to $1.2596, having traded around $1.258 earlier on. It was up 0.3% against the euro at 86.67 pence, versus 86.87 pence shortly before the decision.
MONEY MARKETS: Gilt futures were up 0.3% on the day, while interest-rate futures showed traders believe UK rates will peak around 4.88% by November this year, reflecting very little change on what had been priced in earlier in the day.
JANE FOLEY, HEAD FX STRATEGIST, RABOBANK, LONDON:
"You have to bear in mind, for instance, that in March, sterling was the best performing G10 currency already, so a lot of this was already in the price."
"The market was expecting GDP to be revised up, it was expecting inflation to be revised up. So from that point of view, there isn’t a huge shock. (Bailey) is certainly putting some meat on the bones and providing some colour, but in terms of the general direction, I think the market already had it right."
SHANE O’NEILL, HEAD OF INTEREST RATES, VALIDUS RISK MANAGEMENT, LONDON:
"From this release, there doesn't appear to be a target rate in mind, but rather we're looking for a rate which gets the job done on the inflation front. Markets continue to price an additional 50 bps of hikes, coming over the next two to three meetings – though not a game-changing meeting, this definitely errs on the more hawkish side of recent BoE communication and should support the strength seen in sterling against the dollar and euro over recent weeks.”
COLIN ASHER, SENIOR ECONOMIST, MIZUHO BANK, LONDON:
"Upside surprises in the data will lead to further hikes, but the peak is near. The final sentence of the summary implies the peak is already here. But then, that's what it implied at the last meeting and they have still hiked today.
"We expect that this will be the final hike in the cycle and that the fall in the CPI in coming months will allow the BoE scope to pause but the risks to this view remain on the upside."
PETER SCHAFFRIK, GLOBAL MACRO STRATEGIST, RBC CAPITAL MARKETS, LONDON:
"The decision was as expected and 25 bps was priced in by markets."
"The change in the underlying assumptions were slightly on the hawkish side and they upgraded GDP and inflation expectations and also stressed tightness in the labour market."
JEREMY BATSTONE-CARR, EUROPEAN STRATEGIST, RAYMOND JAMES, FRANCE:
"The question we should be asking is why is the Bank continuing to raise rates when it has already forecast a mighty fall in inflation by early next year? The answer lies in the Bank’s as yet unspoken desire to drive real short-term interest rates above zero for the first time since before the financial crisis of 2008/09. We may therefore not yet be at the end of the rate hiking cycle."
ALEX LIVINGSTONE, HEAD OF TRADING - FX & ETFS, TITAN ASSET MANAGEMENT, LONDON:
"The Bank of England decided to raise rates by 0.25% today, taking interest rates to 4.5%. As inflation remains in the double digits, and wages remain hot, the hike comes as little surprise. The widely expected rise in interest rates has recently allowed sterling/dollar to surpass 1.26 as yield differentials have narrowed."
DOUGLAS GRANT, GROUP CEO AT MANX FINANCIAL GROUP PLC, LONDON:
"Today's rise in interest rates is yet another blow to businesses struggling to manoeuvre as cash flows are squeezed. Stubbornly high inflation and flat-lining GDP data highlighted sluggishness that may be difficult to shake off. Indeed, coupled with the global banking sector showing signs of weakness, SMEs must take this as yet another reminder to review their existing lending structures and ensure they are prepared for further challenges."
(Reporting by EMEA Markets & Finance teams; Editing by Dhara Ranasinghe and Yoruk Bahceli)