Surprise rate hike!
The Bank of England (BoE) delivered an interest rate hike of 0.15% during their monetary policy announcement last Thursday. Out of the nine committee members, eight voted for a rate hike while one voted for rate to remain unchanged at the previous 0.10%. All nine members voted for no change of corporate bond purchases at £20 billion and UK government bond purchases at £875 billion, totaling £895 billion.
With an almost unanimous decision to hike interest rate as opposed to the previous meeting whereby only two members voted for a rate hike, it seems like the committee members are downplaying the impact of the COVID Omicron variant despite the recent spike in Omicron cases in the UK.
Reasons behind the hike
The first motivating factor for the BoE to hike interest rate is the resilient job market. To the surprise of the central bank, there was no concrete evidence that the ending of the UK furlough scheme in September led to a weakening in the labour market. Instead, the latest data released by the Labour Force Survey indicated that unemployment rate has fallen to 4.2% in the three months to October and that 257,000 jobs were added into the economy in November, thus showing little impact from the exiting of the furlough scheme. Moreover, the central bank’s committee highlighted during the November’s meeting that if future employment data were to be in line with its projection, it will be necessary for rate hikes to take place in order to tone down inflation and maintain it at the BoE’s 2% target. And during the meeting last week, the central bank deemed that the condition has been met, thus an interest rate hike is warranted.
Another motivating factor for the rate hike is the recent strong inflation that has caught the attention of the UK Finance minister, leading to the exchange of open letters between him and BoE Governor Bailey. In November, prices in the UK rose to a 10-year high level of 5.1% and is expected to remain around the same level throughout the winter period and peak around 6% in next April.
Being the first G7 central bank to carry out an interest rate hike, we can certainly expect the next hike to come as soon as February 2022 since inflation is on the way to triple the central bank’s 2% target.
The Bank of England (BoE) delivered an interest rate hike of 0.15% during their monetary policy announcement last Thursday. Out of the nine committee members, eight voted for a rate hike while one voted for rate to remain unchanged at the previous 0.10%. All nine members voted for no change of corporate bond purchases at £20 billion and UK government bond purchases at £875 billion, totaling £895 billion.
With an almost unanimous decision to hike interest rate as opposed to the previous meeting whereby only two members voted for a rate hike, it seems like the committee members are downplaying the impact of the COVID Omicron variant despite the recent spike in Omicron cases in the UK.
Reasons behind the hike
The first motivating factor for the BoE to hike interest rate is the resilient job market. To the surprise of the central bank, there was no concrete evidence that the ending of the UK furlough scheme in September led to a weakening in the labour market. Instead, the latest data released by the Labour Force Survey indicated that unemployment rate has fallen to 4.2% in the three months to October and that 257,000 jobs were added into the economy in November, thus showing little impact from the exiting of the furlough scheme. Moreover, the central bank’s committee highlighted during the November’s meeting that if future employment data were to be in line with its projection, it will be necessary for rate hikes to take place in order to tone down inflation and maintain it at the BoE’s 2% target. And during the meeting last week, the central bank deemed that the condition has been met, thus an interest rate hike is warranted.
Another motivating factor for the rate hike is the recent strong inflation that has caught the attention of the UK Finance minister, leading to the exchange of open letters between him and BoE Governor Bailey. In November, prices in the UK rose to a 10-year high level of 5.1% and is expected to remain around the same level throughout the winter period and peak around 6% in next April.
Being the first G7 central bank to carry out an interest rate hike, we can certainly expect the next hike to come as soon as February 2022 since inflation is on the way to triple the central bank’s 2% target.