LONDON (Reuters) - The Bank of England raised interest rates for the 10th time in a row on Thursday, but dropped a pledge to keep increasing them "forcefully" if needed and said inflation had probably peaked, sending the pound to session lows in volatile trade.
Softening their forecasts of recession this year, the BoE's nine interest rate-setters voted 7-2 to increase Bank Rate to 4.0% - its highest since 2008 - from 3.5%.
MARKET REACTION:
STOCKS: The FTSE 100 dipped initially before bouncing back, and was last up 0.6% on the day, compared with a gain of 0.5% before the decision. The mid-cap index jumped 2.1%.
FOREX: Sterling briefly turned positive, but surrendered those gains and was last down 0.6% at $1.2298 and down 0.7% against the euro at 89.43 pence.
BONDS: The yield on Britain's 10-year government bond initially spiked but then fell below levels seen before the decision. It was last down 15 basis points to 3.156%.
COMMENTS:
DANIELE ANTONUCCI, CHIEF ECONOMIST, QUINTET PRIVATE BANK, LONDON:
"There’s still some risk that the Bank could go for further interest rate rises if inflation news were unfavourable. After all, the Committee still sees risks to the inflation outlook as skewed to the upside.
That said, today’s decision raises the possibility that the Bank rate may have already peaked or be close to peaking, undershooting the 4.5% level priced in by financial markets prior to this announcement."
WES MCCOY, SENIOR INVESTMENT DIRECTOR AT STANDARD LIFE INVESTMENTS, ABRDN:
“When you read the commentary around it (rate hike) the Bank of England seemed more hawkish and still more concerned about inflation. The language around it was a 50 bps rise but also around that they still need to stay on the pressure against inflation. Whereas, the interpretation from the U.S overnight was there are reasons to step away from that pressure.”
DEAN TURNER, CHIEF EUROZONE AND UK ECONOMIST, UBS GLOBAL WEALTH MANAGEMENT, LONDON:
‘As expected, today’s 50 basis-point hike was a split decision. It looks as though the appetite for further outsized hikes is fading but given the BoE’s revised outlook for growth and inflation, this hiking cycle is unlikely to be over just yet. We look for one further increase of 25 basis points in March which should mark the top of the cycle. Furthermore, we believe the door remains open for rate cuts before the year is out.
PIOTR MATYS, SENIOR FX ANALYST, INTOUCH CAPITAL MARKETS, LONDON;
"There seems to be a preference to sell sterling especially against the euro and investors adopted such a preference back in December when the BOE delivered a dovish 50 bps bike and on the same say President Lagarde sounded significantly more hawkish, and we may witness similar situation today.
The outlook for the UK economy is still quite challenging compared to the euro zone and U.S., that is why GBP, after a knee-jerk reaction, resumed its decline."
"The biggest risk to EURGBP today is if President Lagarde suddenly changes her tome and sounds far less hawkish following a widely expected 50 bps hike."
BEN LAIDLER, GLOBAL MARKETS STRATEGIST, ETORO, LONDON:
"This is clearly the last big hike from the Bank of England, we’re on track for this rate cycle to finish in March or May."
"They’re very much following the Fed’s lead in getting rates to a high enough level where they're comfortable waiting to see what happens."
"They’ve got some quite aggressive assumptions though, and there’s uncertainty around them... They’re looking for a very sharp fall in inflation to 4% by the end of the year, from 10.5% now… so that remains to be seen. The initial spike (in the pound) is always the machines rather than the humans."
MICHAEL BROWN, MARKETS STRATEGY, TRADERX, LONDON:
"The move in the pound was the vote split. I think market participants were expecting at least one to go for a more modest 25 basis points and that may have been one of the reasons why we saw cable come off."
"They dropped the 'forcefully' out of the language. That pretty much nails on the fact that March is probably going to be the last rate hike and, of course, the longer-run inflation forecasts have come quite sharply lower as well."
"So it's a bit more surprising in terms of votes - a bit more hawkish than we'd expected - but everything else is pretty much in line and mostly implying that the 'Old Lady' is very, very close to the end in terms of raising rates."
SIMON HARVEY, HEAD OF FX ANALYSIS, MONEX EUROPE, LONDON:
"This is as straight down the line as you can get in terms of matching expectations from ahead of the meeting. They pretty much matched the market implied forecasts for rate increases, removed language saying they “will respond forcefully, as necessary" to signs of further inflation pressure and there was no increase in dovish dissenters.” (Two members of the rate-setting committee voted to keep rates on hold as expected)"
“We think they will step down to 25 basis points in March, but the question is what tone of the press conference will be like, that’s where markets are really trying to suss out the underlying feel of how they are thinking about monetary policy.”
JEREMY BATSTONE-CARR, EUROPEAN STRATEGIST AT RAYMOND JAMES INVESTMENT SERVICES, LONDON:
"More noteworthy is the corresponding Monetary Policy Report, which has revealed that the Bank now expects a shorter and shallower recession – a far cry from the rather dire predictions of only a few weeks ago.
"Yet for the Bank of England and the MPC, this good news is a wolf in sheep’s clothing. The economy’s unexpected resilience is keeping the inflationary fuel flowing, putting more pressure on the Bank to raise rates in its attempts to stem the flow. With the Bank’s upward revisions, the MPC may have to do the work they had hoped a lacklustre economy would achieve on its own."
MIKE COOP, CHIEF INVESTMENT OFFICER UK, MORNINGSTAR INVESTMENT MANAGEMENT, LONDON:
"While the highest point of inflation is likely behind us, today’s rate rise shows that the year ahead will be a difficult one with the unusual cocktail of high inflation, rising rates and recession. Inflation outlook can change quickly and investors need to prepare portfolios for a range of inflation scenarios. The good news is that at current yields bonds are less sensitive to further rate rises, recession is cooling demand led inflationary pressures and gas prices have fallen sharply."