BoE Hikes Rates Again, But It’s Looking More Divided

BoE Hikes Rates Again, But It’s Looking More Divided
Paul Allison, CFA

about 1 year ago2 mins

The Bank of England (BoE) kind of had to stay in full-on Ebenezer Scrooge mode – at least where interest rates are concerned. So its announcement Thursday of another 0.5 percentage point rate hike didn’t come as much of a surprise. With the UK’s inflation still red-hot, the central bank’s got little choice but to use its key instrument – rate hikes – to try yet again to cool it down.

Still, the decision wasn’t unanimous: two members of the BoE’s rate-setting committee voted to hold the key rate at 3%, rather than raising it to 3.5%. That’s quite something given inflation’s still running riot. But it does reflect the delicate balance that central banks are facing: how to raise rates just enough to bring down inflation without pushing the whole economy into a deep downturn. The BoE’s approach to this conundrum, for now, is to continue to press hard on the rate-rising pedal, while pointing to a future where the peak rate won't need to be as high as some economists fear. And all that pouring cold water on the UK’s economic future may be doing the trick. After today’s decision, the market’s now expecting UK rates to peak slightly below 4.5% in the summer of next year, down from about 5% a couple of months ago.

What’s interesting about that is that the BoE’s counterpart across the pond is taking an opposite approach. On Wednesday, the Federal Reserve (Fed) popped rates up by the same amount – 0.5 percentage points – and hinted at a slower pace of hikes in the near term. But at the same time, the Fed pointed to a future where rates are ultimately likely to be higher than previously expected. And the reason for the difference comes down to confidence. See, while the Fed’s doing its best to tame animal-spirited Americans and stop inflation from running out of control, the BoE’s trying to reassure gloomy Brits, who are grappling with a cost of living crisis and fearful of near-term mortgage refinancing, that there may be an end in sight to all these burdensome rate hikes.

We’ll have to see which of these nuanced approaches succeeds, if either.

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