Bank of England raises interest rate by 50 basis points to 3.5%

[Key points of Bank of England interest rate decision]

Interest rate level: The pace of interest rate hikes slowed down to 50 basis points, and the interest rate rose to 3.5%.

Economic forecasts: UK is in recession and will be in recession longer term; Q4 GDP growth forecast raised to -0.1% from -0.3%.

Interest rate hike guidelines: Most members believe that further interest rate hikes may be required.

Inflation expectations: Inflation will be slightly below target from 2024; the autumn fiscal report has little impact on inflation in 1-3 years.

Voting ratio: There are three factions internally divided, two votes in favor of keeping interest rates unchanged, a majority in favor of raising interest rates by 50 basis points, and one vote in favor of raising interest rates by 75 basis points.

Market bets: The UK overnight index swap market has trimmed bets on peak interest rates slightly, now looking at just under 4.5% in August 2023.

[The British economy is already in recession]

The Bank of England said it believed the U.K. economy was already in recession and would persist for a "prolonged period," the first risk to two of its nine rate-setters had grown. It was the first time since March that policymakers voted against raising the key interest rate, a sign that a rate peak may be around the corner.

[The Bank of England is expected to raise interest rates further in the future]

The Bank of England raised interest rates for the ninth time in a row. The Bank of England is trying to accelerate inflation back to target after price increases hit a 41-year high in October. The Bank of England's Monetary Policy Committee voted 6-3 in favor of the move and said "further increases in Bank Rate" may be needed to counter what it fears will be persistent domestic inflationary pressures from prices and wages. The BoE statement did not repeat the unusual language from November, when it said interest rates were unlikely to need to rise as markets expected. Since then, market rate expectations have eased.

[The Bank of England hawkish surprise may boost the pound]

If the Bank of England pushes back against market expectations of peak interest rates, saying it is too high, the pound could be sold off, especially if the statement or minutes again overturn the current market pricing for UK rates. The Bank of England is expected to raise interest rates by 50 basis points to 3.50%, although policymakers may be divided on this decision, which may also affect the market. However, another 75 basis point rate hike cannot be ruled out, which would boost the pound.

[Rise interest rate by 75 basis points to resist inflation psychology]

Mann, a member of the Bank of England, believes that a 75 basis point interest rate increase is needed to resist "inflationary psychology". Price and wage pressures are greater than expected in November. Unchanged, GDP down 0.5% over three years, BoE statement did not repeat November statement that interest rates are unlikely to peak as markets imply; budget decision in November Treasury report means 2Q Inflation would be 0.75 percentage points below the BoE's forecast, but the longer-term impact would be minimal.

[Two members opposed to raising interest rates said that inflation should return to the target level]

Two members of the Bank of England who opposed interest rate hikes said it was time to stop raising interest rates altogether because the measures taken so far were "sufficient" to bring inflation back to target levels; There is a "small" impact on CPI over three years, with economic growth forecast to be 0.1% lower due to budget measures to provide short-term stimulus, and economic output a year later to be 0.4% higher than previously forecast.

[The central bank's vote split has a partial impact on the pound market]

Financial website Forexlive: The disagreement in the Bank of England's vote is the most striking detail, which has partially affected the market for the pound. Combined with the change in the language of the forward guidance, the overall BoE stance on rate hikes appears more dovish.

[Key points of Bank of England interest rate decision]

Interest rate level: The pace of interest rate hikes slowed down to 50 basis points, and the interest rate rose to 3.5%.

Economic forecasts: UK is in recession and will be in recession longer term; Q4 GDP growth forecast raised to -0.1% from -0.3%.

Interest rate hike guidelines: Most members believe that further interest rate hikes may be required.

Inflation expectations: Inflation will be slightly below target from 2024; the autumn fiscal report has little impact on inflation in 1-3 years.

Voting ratio: There are three factions internally divided, two votes in favor of keeping interest rates unchanged, a majority in favor of raising interest rates by 50 basis points, and one vote in favor of raising interest rates by 75 basis points.

Market bets: The UK overnight index swap market has trimmed bets on peak interest rates slightly, now looking at just under 4.5% in August 2023.

[The British economy is already in recession]

The Bank of England said it believed the U.K. economy was already in recession and would persist for a "prolonged period," the first risk to two of its nine rate-setters had grown. It was the first time since March that policymakers voted against raising the key interest rate, a sign that a rate peak may be around the corner.

[The Bank of England is expected to raise interest rates further in the future]

The Bank of England raised interest rates for the ninth time in a row. The Bank of England is trying to accelerate inflation back to target after price increases hit a 41-year high in October. The Bank of England's Monetary Policy Committee voted 6-3 in favor of the move and said "further increases in Bank Rate" may be needed to counter what it fears will be persistent domestic inflationary pressures from prices and wages. The BoE statement did not repeat the unusual language from November, when it said interest rates were unlikely to need to rise as markets expected. Since then, market rate expectations have eased.

[The Bank of England hawkish surprise may boost the pound]

If the Bank of England pushes back against market expectations of peak interest rates, saying it is too high, the pound could be sold off, especially if the statement or minutes again overturn the current market pricing for UK rates. The Bank of England is expected to raise interest rates by 50 basis points to 3.50%, although policymakers may be divided on this decision, which may also affect the market. However, another 75 basis point rate hike cannot be ruled out, which would boost the pound.

[Rise interest rate by 75 basis points to resist inflation psychology]

Mann, a member of the Bank of England, believes that a 75 basis point interest rate increase is needed to resist "inflationary psychology". Price and wage pressures are greater than expected in November. Unchanged, GDP down 0.5% over three years, BoE statement did not repeat November statement that interest rates are unlikely to peak as markets imply; budget decision in November Treasury report means 2Q Inflation would be 0.75 percentage points below the BoE's forecast, but the longer-term impact would be minimal.

[Two members opposed to raising interest rates said that inflation should return to the target level]

Two members of the Bank of England who opposed interest rate hikes said it was time to stop raising interest rates altogether because the measures taken so far were "sufficient" to bring inflation back to target levels; There is a "small" impact on CPI over three years, with economic growth forecast to be 0.1% lower due to budget measures to provide short-term stimulus, and economic output a year later to be 0.4% higher than previously forecast.

[The central bank's vote split has a partial impact on the pound market]

Financial website Forexlive: The disagreement in the Bank of England's vote is the most striking detail, which has partially affected the market for the pound. Combined with the change in the language of the forward guidance, the overall BoE stance on rate hikes appears more dovish.