LONDON (Reuters) - The Bank of England raised interest rates by the most in 27 years on Thursday, despite warning that a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13%.
Reeling from a surge in energy prices caused by Russia's invasion of Ukraine, the BoE's Monetary Policy Committee voted 8-1 for a half percentage point rise in Bank Rate to 1.75% - its highest level since late 2008 - from 1.25%.
STOCKS: British stocks extended gains after the central bank decision and were up nearly 0.5% on the day. Banking stocks jumped briefly before consolidating gains.
FOREX: The pound edged higher immediately after the rate decision but then turned lower on the day as the central bank said the economy will enter into a recession by the fourth quarter of 2022.
MONEY MARKETS: Interest rate markets were pricing in about 32 bps of rate hikes by September compared to 34 bps before the rate decision
FRANCES HAQUE, SANTANDER UK CHIEF ECONOMIST:
"With falling growth rates expected and inflation predicted to peak again in October with the next energy price cap, the outlook for the UK economy remains bleak.
"The MPC have repeatedly stated that its purpose is to bring inflation back to target and will do what is necessary, in this case raising rates more quickly than previously. The question then remains how much further will the MPC need to go to ensure inflation expectations remain anchored in the medium term."
CHRIS BEAUCHAMP, CHIEF MARKET ANALYST, IG GROUP:
"Having spent months trying to raise rates cautiously in order to avoid triggering a recession, it now expects one anyway, with further declines in real income.
"Set against a U.S. economy that seems to be weathering rate hikes reasonably well, there seems little reason to chase the rally in sterling here."
SHANE O'NEILL, HEAD OF INTEREST RATES, VALIDUS RISK MANAGEMENT, LONDON:
"Unsurprisingly, the market has latched onto the worsening forecasts more than the expected 50 bps hike and we have seen the pound fall more than 0.5% against the dollar and the euro immediately following the release.
"The dreary predictions from the MPC represent ongoing pain for the consumer and focus will quickly turn to politicians to act. With Liz Truss the heavy favourite to take the Tory leadership, she may find the position a poisoned chalice as she takes the wheel just as we enter the worst recession in over a decade."
JANET MUI, HEAD OF MARKET ANALYSIS, BREWIN DOLPHIN:
"The move is in line with the outsized rate increases other major central banks have done recently. Financial markets expect the bank rate to eventually peak at close to 3% sometime in 2023, so there is some way to go before the bank pauses.
“With the forthcoming jumbo increases in energy bills and further tightening in financial conditions for some households and corporates, the cost of living crisis will be a burning policy issue for the contenders of the next prime minister.”
SAM COOPER, VICE PRESIDENT, MARKET RISK SOLUTIONS, SILICON VALLEY BANK:
"No surprise in the headline decision to hike the interest rate by a 0.50% increment. However, the bleak outlook for GDP and rising inflation forecasts included in the meeting minutes have dampened market confidence and this has translated into a weaker sterling."
STUART COLE, HEAD MACRO ECONOMIST, EQUITI CAPITAL:
"What I think is very telling is that the forecast for inflation for end 2023 is higher than CPI is at the moment. It is hard not to see more 50bps hikes being delivered given that fact.
"Add onto that the upwards revision to CPI, which is now seen peaking at 13.3% and remaining elevated throughout next year, and it all points to a tough policy dilemma for the BoE going forward."
PAUL CRAIG, PORTFOLIO MANAGER, QUILTER INVESTORS, LONDON:
"In the back of the mind of policy makers will be the current public mood. Sentiment is shifting against the Bank of England with a recent survey pointing to more people being dissatisfied with the job it is doing than satisfied people.
"The other significant shift from the BoE in recent weeks was the dropping of mortgage affordability rules. With the economic picture looking incredibly challenging, and mortgage rates subsequently rising off the back of the BoE's moves, the decision to drop those rules is looking more and more circumspect by the day. There is a concern the lessons of 2008 are beginning to be forgotten."
(Reporting by the London Markets and Finance Team; Compiled by Saikat Chatterjee; Editing by Toby Chopra and Mike Harrison)