The central bank also downgraded its growth outlook as recession looms.
Hot on the hiking heels of the US Federal Reserve, the Bank of England (BoE) reacted in a similar fashion to the recent uncomfortably high inflation data by hiking 25 bps in the base rate to 1%. End of the year estimates of where rates will stand are still pricing in five further hikes at every committee meeting to get us close to 2.25%. Of the nine officials, six voted for a 25 bps hike and three for a 50 bps hike, a tad more hawkish than expected. The BoE’s growth outlook for the UK has been downgraded, pointing to a 1% output collapse in the fourth quarter of this year as the cost of living crisis bites and further energy price caps are removed. For 2023, it now sees a full year contraction of 0.25%. So while normally a gloomy growth outlook runs anathema to hiking rates, the BoE knows it has to play a desperate catch-up in monetary policy. Sterling remains fairly unloved, falling against the dollar and the euro as markets price in an economy flirting quite finely with a recession sometime soon and with inflation running over five times its target. The governor of the BoE normally sends a letter to the chancellor when the target is missed but it would seem a novel might be more appropriate.
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