Midday Brief – BoE Shock

The British pound failed to react and the FTSE100 tanked as the Bank of England raised its policy interest rate by 50 basis points to 5.0% during its June meeting, marking the 13th consecutive hike.

This decision seriously surprised market expectations of a smaller 25 basis point rate hike and pushed borrowing costs to their highest level since the 2008 financial crisis, all in an effort to combat persistent inflation.

Policymakers have also pledged to deliver further rate hikes if the ongoing inflationary pressures persist. Latest data revealed that British inflation unexpectedly held steady at 8.7% in the year to May.

The market reaction in UK stocks, especially homebuilders, was bad as it went well beyond predictions of a modest decline to 8.4% and remaining significantly above the central bank’s target of 2%.

Furthermore, the core inflation rate accelerated to a 31-year high of 7.1% this week, which may have prompted the central bank to take more drastic action during the summer months.

The Bank of England initiated the rate hikes nearly a year and a half ago, making it the first major central bank to take such action and resulting in the fastest policy tightening in over 30 years.

The guidance and statement details don’t reflect much of a change to before, which suggests that the central bank is still on the tightening path.

Traders had been pricing in either a 50 bps move for today or August so it’s good to have this out of the way now. The peak rate in terms of OIS pricing remains close to the 6% mark (now 6.05%), just a touch higher than the 5.93% priced in ahead of the decision.