At a time when policymakers are grappling with high inflation, the Bank of England (BoE) caught the markets off guard on Thursday by raising interest rates by 50 basis points, marking the 13th consecutive hike.
The Monetary Policy Committee voted 7-2 in favor of a half-point increase, taking the bank’s base interest rate to 5 percent, going against market expectations of a 25 basis point hike, which was surprising given that there was a 60 percent chance of the latter occurring.
Read more: Bank of England preparing for biggest interest rate increase in 33 years
After the announcement, the pound depreciated against the dollar, and the yields on UK gilts declined, with the 10-year yield dropping by 5 basis points.
The release of new data on Wednesday revealed that the UK’s annual consumer price inflation remained unchanged at 8.7 percent in May, compared to the previous month. This reinforces market expectations that the Monetary Policy Committee will opt for another increase.
Furthermore, economists have heightened their expectations for future monetary tightening.
Of greatest concern to the Central Bank is the core inflation rate, which excludes the volatile prices of energy, food, alcohol, and tobacco. In May, it rose to 7.1 percent on a yearly basis, up from 6.8 percent in April, and reached its highest level since March 1992.
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