Bank of England raises interest rates by 50bps to 5%

June 22, 2023 (MLN): The Bank of England raised its key interest rate by 50 basis points to 5%, seeking to curb the highest inflation in any major economy.

Notably, this is the 13th consecutive rate hike, taking the interest rates from 0% in December 2021 to 5% now, pushing borrowing costs to their highest level since the 2008 financial crisis.

This hike is significantly larger than anticipated, as the majority of market participants were only expecting a 25bps increase.

At its meeting ending on June 21 2023, the MPC voted by a majority of 7–2 to increase the bank rate by 50bps, to 5%. While two members preferred to maintain Bank Rate at 4.5%.

At the time of the previous MPC meeting and the May Monetary Policy Report, the market-implied path for bank rates averaged just over 4% over the next three years.

However, since then, gilt yields have risen materially, particularly at shorter maturities, now suggesting a path for bank rate that averages around 5½%. Mortgage rates have also risen notably. The sterling effective exchange rate has appreciated further.

The UK Consumer Prices Index (CPI) rose by 8.7% in the 12 months to May 2023, unchanged from April but down from a recent peak of 11.1% in October 2022.

This showed that inflation remained higher than expected for a fourth month.

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