UK rate surprise roils markets, ECB moves slowly

Markets expected a UK rate hike last month, and got nothing.

This month they expected nothing, and got a surprise increase.

The Bank of England on Thursday (December 16) lifted borrowing costs to 0.25%, from just 0.1% previously.

That made it the first major central bank to move higher.

Governor Andrew Bailey said the bank needed to act on inflation, now forecast to go as high as 6% by April:

"Because we've seen evidence of a very tight labour market and we're seeing more persistent inflation pressures now and that's what we have to act on. You know, we're concerned about inflation in the medium term and we're seeing things now that can threaten that."

Currency and bond markets were stunned by the surprise hike.

Yields on benchmark UK government bonds jumped to two-week highs in the moments after the move.

Sterling rose as much as 0.8% against the dollar.

Data this week showed UK inflation at a 10-year high in November, with surging prices a worry for central banks everywhere.

A day earlier the U.S. Federal Reserve cut its support for the economy, and signaled that next year could see three rate hikes.

The ECB is moving more cautiously though.

On Thursday it cut its growth outlook for the euro zone amid new health worries, and said it would leave some bond buying in place.

The bank left rates untouched, though it too raised inflation forecasts.

In a huge week for central bankers, attention now turns to a Bank of Japan policy decision on Friday (December 17).

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