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The Bank of England enacted its 14th successive interest rate hike on Thursday, lifting bank rate by 25 basis points, and the central bank believes its monetary policy is now in ‘restrictive’ territory.
The move took the benchmark bank rate to 5.25% from 5.00% previously, with a majority of Monetary Policy Committee members voting for the hike.
Two members - Jonathan Hasekl and Catherine Mann - preferred a 50 basis point hike and one member - Swati Dhingra - preferred to maintain the bank rate at 5.00%.
The central bank noted that recent data outturns had been ‘mixed’ but added that some key indicators, notably wage growth, had surprised ‘significantly’ on the upside.
‘This could indicate that the medium-term equilibrium rate of unemployment had risen, and that some of the risks of greater persistence in broader domestic inflationary pressures had crystallised...The most recent indicators of slowing activity needed to be weighed against the surprising resilience of activity over a number of quarters, and it was too early to conclude that the economy was at or very close to a significant turning point. Although the monetary stance was weighing on economic activity, a 0.25 percentage point increase in bank rate at this meeting was necessary to address the risks from greater inflation persistence,’ the statement read.
The BoE said the labour market remains tight, though there are signs it is ‘loosening’.
Last month, data from the Office for National Statistics showed that consumer prices rose by 7.9% in June, cooling from an 8.7% jump in May. June’s reading was lower than market forecasts of 8.2%, as cited by FXStreet.
On Thursday, the MPC said it continues to judge that risks around the modal inflation forecast are ‘skewed to the upside’, albeit by less than in May.
It now forecasts that the yearly inflation will return to its 2% target by the second quarter of 2025.
Moving forward, the MPC said it will continue to monitor indications of persistent inflationary pressures and resilience in the economy as a whole, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation.
‘If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,’ the BoE concluded.
‘Given the significant increase in bank rate since the start of this tightening cycle, the current monetary policy stance is restrictive.’
The BoE has hiked by a cumulative 515 basis points in the current hiking cycle.
The pound was slightly weaker in the wake of the decision, trading at $1.2631. Prior to the hike, sterling was quoted at $1.2659.
A press conference with Governor Andrew Bailey will begin at 1230 BST.
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