The Bank of England has raised interest rates to 0.25%. With inflation at a 10-year high, the Bank was pressured to lift borrowing costs from their record lows. Sterling has risen the last few days as markets have raised their expectations for a rate hike on Thursday. Following the news of a rate hike, the pound rose against the US dollar, reaching its highest level in over two weeks, after falling to one-year lows earlier this month.

With positive economic data reflecting a robust market, expectations for a rate hike had strengthened and today markets were not disappointed.

Bank raises interest rates for the first time since the pandemic started

The Bank of England has raised interest rates for the first time since the pandemic started and despite concerns over the Omicron variant. The Bank’s monetary policy committee (MPC) voted to raise rates from their historic lows of 0.1% to 0.25%, as inflationary pressures outweighed the risks to the economy from Omicron.

Governor Andrew Bailey, Deputy Governors Ben Broadbent, Jon Cunliffe and Dave Ramsden, Chief Economist Huw Pill, and Michael Saunders, Jonathan Haskel, and Catherine L Mann voted to raise interest rates to 0.25%. The only member who voted against was Silvana Tenreyro who preferred to keep the Bank Rate at 0.1%.

Why an interest rate hike now?

The Bank of England has raised interest rates due to inflationary pressures as prices are rising and the labour market looks strong enough. The Bank now expects the CPI inflation rate to reach 6% in Spring, which is more than its 2% target. According to the Bank’s minutes, 12-month CPI inflation rose from 3.1% in September to 5.1% in November and led to an exchange of letters between the Governor Andrew Bailey and Chancellor of the Exchequer. These are included in today’s minutes. The Bank expects inflation to remain around 5% during the next couple of months and hit 6% in April 2022.  

In regards to unemployment, the BoE has assessed the labour market’s condition and recent data that showed that the unemployment rate has fallen and vacancies rose. In their last meeting, the Bank projected that if the economic data and especially the statistics about the labour market were in line with their projections then it would be necessary to raise rates in order to control inflation.

The latest reports have confirmed that these conditions have been met. The labour market is strong and has continued to strengthen. Although the Omicron variant might affect near-term activity, its impact in the longer term is not clear yet.

Bank of England is the first major central bank to raise interest rates

The BoE is the first central bank to raise interest rates in the pandemic. The rate hike comes two days after the International Monetary Fund said the Bank of England should not delay tightening its policy amidst increasing inflation concerns.

The markets are now pricing in further rate rises for next year, with another rate hike in February.

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