Breaking: Bank of England hikes interest rates by 15bps to 0.25%, GBP surges

The Bank of England announced on Thursday that it would hike its benchmark interest rate by 15bps at 0.25%. The Monetary Policy Committee voted 8-1 in favour of the rate hike. Silvana Tenreyro was the lone dissenter voting against the rate hike. 

Leading up to the meeting, markets had been pricing a roughly 60% chance of a hike, with these odds rising in wake of Wednesday’s hotter than expected UK November Consumer Price Inflation report, which came on the heels of a strong labour market report on Tuesday.

The majority of economists had expected the BoE to hold interest rates at 0.1%, though these polls (conducted by newswires) were released prior to Wednesday’s inflation surprise. Market watchers and participants, as indicated by various other polls (such as on social media) had seemed split over whether the BoE would hike or hold.

Additional Takeaways as summarised by Reuters

On the Omicron variant...

“The Omicron variant on the basis of current knowledge posed new risks to public health.”

“The Omicron variant posed downside risks to activity in early 2022, although the balance of its effects on demand and supply, and hence on medium-term global inflationary pressures, was unclear.”

“Successive waves of covid appeared to have had less impact on GDP, although there was uncertainty around the extent to which that would prove to be the case on this occasion.”

“Some tentative signs that UK economic activity had started to be affected by the emergence and spread of Omicron.”

“Experience since march 2020 suggests that successive waves of covid appear to have had less impact on GDP, although there is uncertainty around the extent to which that will prove to be the case on this occasion.”

“The Omicron variant poses downside risks to activity in early 2022.”

“The balance of Omicron's effects on demand and supply, and hence on medium-term global inflationary pressures, is unclear.”

“Given the clear signs of increased transmissibility for the new variant, there was the potential for a very high number of infections over a very short period.”

On the economic outlook...

“Staff had revised down their expectations for the level of UK GDP in 2021 q4 by around ½% since the November report, leaving GDP around 1½% below its pre-covid level.”

“Level of global GDP in 2021 q4 is likely to be broadly in line with the November report projection.”

“Little sign in the available data that the closure of the coronavirus job retention scheme at the end of September had led to a weakening in the labour market.”

“Possible that the unemployment rate could fall further over coming months if hiring continued to keep pace with the current elevated levels of vacancies.”

“The LFS unemployment rate is now expected to fall to around 4% in 2021 q4, compared with the 4 1/2% projection in the November report.”

“Underlying earnings growth had remained above pre-pandemic rates, and the committee continued to see upside risks around the projection for pay.”

“Bank staff continue to estimate that underlying earnings growth has remained above pre-pandemic rates.”

“Bank staff expected inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022.”

“CPI inflation is still expected to fall back in the second half of next year.”

“Contacts of the bank's agents expect further price increases next year driven in large part by pay and energy costs.”

Market Reaction

GBP surged as dovish bets for an interest rate hold were priced out. GBP/USD lept from around 1.3280 to current levels in the 1.3330s, where it now trades higher on the day by more than 0.5%. EUR/GBP slumped from slightly above 0.8500 to the 0.8460s, where it now trades lower on the day by about0.5%.