The Bank of England raised interest rates for the second time in three months yesterday in an attempt to tame rising inflation. The Monetary Policy Committee voted by a majority of five to four to increase the cost of borrowing from 0.25% to 0.5%. It should be noted that the minority who voted against the hike in fact “wanted an even larger increase to 0.75 per cent to get a grip on surging inflationary pressure”. Also at the meeting, in an effort to “increase the power of monetary tightening and bear down on inflation, the MPC voted unanimously not to reinvest any of the £875bn of government bonds it has bought under quantitative easing programmes when they mature”. From the minutes of the meeting, it is clear the majority of the MPC members who voted for the quarter point rise believe that inflation will remain “materially” above the BoE’s 2% target this year “while the economy weakened as households were squeezed”. The central bank also significantly reduced its economic forecast, noting that UK economic growth would soon “slow to subdued rates” of around 1% a year.
Cable spiked off the back of the BoE’s rate hike, breaking past the 1.36 barrier. GBPUSD started the day at 1.3557 and closed at 1.3617.
The Euro also had an impressive show of form on Thursday after “ECB president Christine Lagarde fuelled expectations of faster monetary policy tightening”. Coming as a surprise to investors, Lagarde “acknowledged that inflation was running hotter than expected and with risks tilted to the upside, but continued to forecast it would ease through this year”.
After starting the session at 1.2003, GBPEUR dropped below the 1.19 handle, closing the day at 1.1898.
EURUSD was also able to make solid advanced on Thursday. The pair opened at 1.1294 and soared beyond 1.14, closing at 1.1444.
