The Bank of England (BoE) was widely expected to deliver a 14th consecutive rate hike at today's meeting. Still, the money markets were split on the extent of the increase. Ahead of the meeting, there was a 60% probability of a 25-basis point (bps) hike and a 40% chance of a 50-bps increase. The Monetary Policy Committee (MPC) voted 6-3 in favor of a 25-bps increase – two members favored a 50-bps hike, and one voted to keep the rate unchanged.
The MPC struck a hawkish tone in its monetary policy summary, stating that the MPC would “ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target.” This signals that the BoE is prepared to continue raising rates for as long as necessary until inflation is beaten.
Inflation Forecast Revised Lower to 4.9%
At today’s meeting, the BoE revised its inflation forecast to 4.9% by the end of the year. This is slightly lower than the May forecast of 5.0%. Inflation is heading in the right direction, but the decline has been slow - inflation dropped to 7.9% in June, down from 8.7%. There is little doubt that the BoE will have to continue tightening until inflation is much closer to the 2% target.
BoE Governor Bailey tried to paint a positive picture at his follow-up press conference, saying that inflation was falling and that he expected inflation to drop to around 7% in July and 5% in October. Bailey noted that higher rates worked to curb inflation, and policy must remain restrictive.
Stock Market Declines, British Pound Edges Lower
The FTSE 100 has declined by 0.83%, and the British Pound has edged lower after the BoE decision.
The FTSE is down 62.56 points (0.84%) at 7497.65 on Thursday.
The GBP/USD currency pair declined by 0.44% on Thursday. GBP/USD opened at $1.2710 and rose slightly to $1.2728 before reversing direction and dropping as low as $1.2620. GBP/USD has pared some of these losses and is trading at $1.2649 in the European session.