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Biggest rate rise in 27 years as Bank of England plays catch up - but where next?

4th August 2022

Bank of England tightens monetary screws.

Rates now the highest since January 2009.

The committee voted 8-1 in favour of a hike to 1.75%, with the lone dissenter preferring a rise to 1.5%.

Inflation now expected to reach over 13% in the final quarter of the year, up from the 11.0% expected in June.

Initial market reaction saw sterling give up some gains from earlier in the day, although markets were generally unphased by the announcement.

Nicholas Hyett, Investment Analyst, Wealth Club said,"The Bank of England is playing catch up after some bumper rate rises from the ECB and Federal Reserve in the last month. The resulting rate hike may be the largest in nearly 30 years, but it was also widely expected, and the market reaction has been modest. Instead, the real focus today is on how much further the bank is willing to go as it seeks to bring inflation back down to its 2% target.

The current inflationary spike is being driven by global food and energy prices, and higher interest rates in the UK will do little to alleviate those pressures. Stronger sterling has the potential to provide some relief. However, rising rates in the US and Europe mean the BoEs actions haven't helped the pound much, and sterling is currently trading near its weakest level against the dollar in over 40 years. The risk now is that higher interest rates start to squeeze consumer and commercial borrowers too much, strangling the life out of the economy without significantly easing the cost-of-living crisis.

Markets still think the Bank has a rate rise or two in the tank, but to some degree UK monetary policy is now caught in global forces over which the Bank has little control. Inflation will rise or fall according to what happens in Ukraine not Threadneedle Street, and rate decisions are dictated by moves at other central banks as much as by the MPC."