BoE hikes rates to fight inflation, but not by enough for 4 officials

LONDON, Feb 3 (Reuters) – The Bank of England raised interest rates to 0.5% on Thursday and nearly half its policymakers wanted a bigger increase to contain rampant price pressures, which the British central bank warned would push inflation above 7%.

In a surprise split decision, four of the nine Monetary Policy Committee members wanted to raise rates to 0.75% in what would have been the biggest increase in borrowing costs since the BoE became operationally independent 25 years ago.

A slim majority, including Governor Andrew Bailey, voted for a 0.25 percentage point increase.

The pound briefly jumped above $1.36, its highest level since Jan. 20, and touched a two-year high against the euro before falling back after the European Central Bank raised the possibility of a rate hike of its own.

British government bonds sold off, with the 10-year yield at its highest since January 2019.

The BoE, which in December became the first major central bank to raise rates since the pandemic, flagged further modest tightening “in the coming months” even though growth will be hurt by global energy and goods price inflation.

But Bailey told investors not to assume the BoE was embarking on a long series of rate hikes, and said there would have to be a trade-off between strong inflation and weakening growth as many households see their incomes squeezed.

Earlier, finance minister Rishi Sunak detailed measures to help households cope with a leap in energy prices in April, when taxes for workers and firms are due to rise. read more

Bailey said he had a “hard message” for the public.

“We have not raised interest rates today because the economy is roaring away,” he told reporters. “An increase in Bank Rate is necessary because it is unlikely that inflation will return to target without it.”

Britain was facing an “extreme example” of an economic shock that would raise the cost of living for everyone, Bailey warned.

Some analysts said the BoE risked adding to the financial pain.

“We think that they are effectively cracking a supply side nut with a demand side hammer,” Richard McGuire, head of rates strategy at Rabobank, said.

James Athey, investment director at abrdn, said inflation expectations in financial markets were little changed by the BoE’s announcement.

“The Bank seemingly cannot win in such a scenario as the market is essentially saying that if they don’t create a recession then inflation won’t come down far enough,” he said.

Thursday’s move marked the first back-to-back increases in Bank Rate since 2004.