Bank of England enacts its biggest rate hike in 17 years

FTSE 100 ended roughly flat on Thursday even though the Bank of England announced its biggest rate hike since 1995.

Key rate raised to 1.75%

Governor Andrew Bailey lifted rates by 50 basis points this morning to fight inflation that hit a new forty-year high of 9.40% in June. Defending the sixth consecutive rate hike that sent the key rate to 1.75%, he said on a CNBC interview:

This rise in energy prices has exacerbated the fall in real incomes. We’re facing a very big shock to inflation. Our action today was very, very clearly [that] we feel we’ve got to take stronger action.

More alarmingly, BOE now warns the CPI could top 13% in October as the effects of the Ukraine war continue to reflect in the food and energy prices. Its previous forecast was a peak at 11%.

What to expect in September?

Against a rather challenging macroeconomic backdrop, U.K.’s blue-chip index is down only 1.0% versus the start of 2022, which is particularly interesting considering the Bank of England anticipated inflation to remain elevated through much of 2023.

Bailey agrees that higher rates are taking a toll on the GDP and expects the economy to plunge into a recession in the final quarter of 2022. Still, Matthew Ryan – Head of Market Strategy at Ebury does not see the central bank turning any less hawkish in the near-term.

The priority for now clearly remains focused on controlling inflation at the expense of growth. This indicates that another 50-bps rate hike is possible at the next MPC meeting in September, depending on economic data in the interim.