Bank of England's Meeting Delivers Rate Hike and Hawkish Stance

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The Bank of England hiked interest rates at their August 2 meeting by 0.25 percentage points, to 5.25 percent, a 15-year high, and cautioned that borrowing costs would continue at historically high levels for the foreseeable future.

The Bank of England's Monetary Policy Committee (MPC) does not anticipate the tightening of monetary policy to be finished anytime soon due to the need to address excessive inflationary pressure, in contrast to the US Federal Reserve and the ECB, which hiked rates by 0.25% a few weeks earlier.

Inflation in the United Kingdom hit a 41-hour high of 11.1% last year, before beginning a steady decrease that brought it down to 7.9% in June. This represents the fastest rate of inflation among the economies that make up the G7.

Reuters' survey of economists projects that Bank of England rates will peak at 5.75 percent by year's end. That being said, the Bank of England has just revised its projections downward and now predicts that interest rates will peak at over 6% and average about 5.5% over the next three years.

“We know that inflation hits the least well-off the hardest, and we need to make absolutely sure that it falls all the way back to the 2% target," the Governor of the Central Bank Andrew Bailey emphasized.

The politicians voted in favor of raising the rate. However, this year was the first time that they were divided into three separate camps. Catherine L. Mann and Jonathan Haskell, both MPC members, voted in favor of an increase of 0.5 percentage points this month, while Svati Dhingra, also a member of the MPC, voted against any adjustment and cautioned against an excessively stringent monetary policy.

The financial markets anticipate that there is a one-in-three probability of interest rates reaching 5.5%, which would be a replay of the overshoot that occurred in June.

The Bank of England predicts that inflation will drop to 4.9% by the end of the year, which is a quicker rate of decline than anticipated in May.

That being said, the UK’s central bank forecasts that the rate of inflation will fall at a little more gradual pace beginning at the end of the next year and will not revert to its target level of 2% until the second quarter of 2025.