In its latest monetary policy announcement, the Bank of England (BoE) opted to raise the benchmark UK interest rate by a further 25bps to 0.75% from 0.50%, as had been widely expected. GBP’s kneejerk reaction was to drop sharply as a result of only eight on nine Monetary Policy Committee (MPC) members voting to raise interest rates (versus expectations for nine). MPC member John Cunliffe voted to leave rates unchanged at 0.50%. 

In its new statement on monetary policy, the BoE said that it judges that “some further modest tightening might be appropriate in the coming months”, a slightly more dovish wording than that in the February statement when the BoE said further modest tightening “is likely to be appropriate”. The BoE also said that there are risks on both sides of its policy judgment depending on how inflation prospects evolve (which some may view as opening the door to an easing bias).

The bank said it sees CPI inflation peaking at around 8.0% in Q2 2022, though it could go higher later in the year. The bank upgraded slightly its view of GDP growth in Q1 2022 to 0.75% from flat in February. The majority of the MPC said policy should be tightened to reduce the risk that pay trends and inflation become embedded. Global inflation pressures will strengthen considerably in the coming months, the BoE warned, stating that Russia’s invasion of Ukraine is likely to exacerbate supply chain snags. 

Growth in the economies of net energy importers like the UK will slow, the BoE statement added and the bank will act to ensure stability in longer-term inflation expectations. The BoE said it judges that inflation expectations remain well-anchored at present, though the bank will be monitoring them closely. The squeeze on household finances is likely to be significantly larger than expected as recently as February, the statement warned, adding that a new BoE agents survey showed that companies expect 2022 pay increases of 4-6%. 

This article was originally published by Fxstreet.com.Read the original article here.

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