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UK: The BoE further tightens its inflation policy

UK: The BoE further tightens its inflation policy

The Bank of England ( BoE ) raised its main interest rate again on Thursday, to 0.5%, and four of the nine members of its Monetary Policy Committee (MPC) stepped down. pronounced for an even more marked increase, to 0.75%, in order to fight against inflation which could exceed 7% in the spring according to its new forecasts.

This divergence within the MPC is a surprise since the majority of economists and analysts polled by Reuters were counting on a unanimous vote in favor of a rate hike of a quarter of a point.

A rise in the bank rate to 0.75% would have marked the largest hike decided by the BoE since its operational independence 25 years ago.

The institution's governor, Andrew Bailey, told a press conference that investors should not conclude from Thursday's decision that the BoE was embarking on a long series of rate hikes, explaining that it should arbitrate between the acceleration of inflation and the slowdown of growth, many households seeing their purchasing power diminish.

“The MPC judges that if the economic situation develops broadly in line with the February central scenario, modest additional tightening may be appropriate in the coming months,” he said.

“But it would be a mistake to simplistically extrapolate from what we did today and assume that rates are now inevitably on a long climb.”

The central bank had already raised its key rate in December, the first tightening of monetary policy by one of the world's main central banks since the outbreak of the COVID -19 crisis in early 2020. It had not announced two back-to-back rate hikes since 2004.

Shortly after the publication of the press release, the futures markets were anticipating a key rate of 1.5% at the end of the year.

For Suren Thiru, economic director of the British Chambers of Commerce, the BoE's decisions and the fact that four MPC members voted for a half-point rate hike should lead many observers to conclude that the central bank operates "a leap towards a lasting period of significant monetary tightening".


INFLATION NOW EXPECTED AROUND 7.25% IN APRIL

The BoE explains on Thursday that consumer price inflation, which reached 5.4% year on year in December, its fastest pace in nearly 30 years, should peak around 7.25% in April, a level unprecedented since the recession of the early 1990s. In December, it was counting on a peak close to 6%.

Ofgem, the national energy market regulator, announced on Thursday morning that administered tariffs would increase by 54% from April, an unprecedented increase due among other things to the surge in world oil prices. gas.

"Given the current tightness in the labor market and continued signs of increased persistence of cost and price pressures, all Committee members agreed that a policy rate hike was warranted at this meeting.", said the MPC in a press release.

The central bank also plans to begin a process of "quantitative tightening" in March, namely the reduction of its portfolio of government bonds, inflated by years of purchases on the markets aimed at lowering the cost of credit. .

This process will initially involve stopping the reinvestment of capital generated by maturing bonds, ie £27.9 billion for the month of March.

The BoE also plans to sell all of the corporate bonds it holds by the end of 2023.

In the markets, the yield on ten-year "gilts", British government bonds, was up more than eight basis points at 1.34% around 1:15 p.m. GMT after hitting its highest level in three years at 1.381%.

The pound sterling had then returned to equilibrium against the dollar after a brief period of rise and the FTSE 100 index of the London Stock Exchange lost 0.22%. (Report Andy Bruce and David Milliken, French version Marc Angrand, edited by Sophie Louet)

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