Breaking: BoE lifts policy rate by 50 bps to 5% in June vs 4.75% expected

Following its June policy meeting, the Bank of England (BOE) announced that it raised the policy rate by 50 basis points (bps) to 5%. Markets were expecting the BOE to hike the policy rate to 4.75%. Two policymakers, Tenreyro and Dhingra, voted to keep the policy rate on hold at 4.5%.

In its policy statement, the BOE repeated the statement that read "if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required." The BOE also acknowledged that significant upside news in recent data point to more persistence in the UK inflation.

Follow our live coverage of the market reaction to the BoE policy announcements.

Market reaction

GBP/USD gathered bullish momentum with the initial reaction and climbed above 1.2800.

Assessing the BoE's policy announcements, "the OIS pricing of the BoE peak rate is now at 6.05%, almost close to 5.93% priced in ahead of the decision, not a decisive change," noted FXStreet Analyst Dhwani Mehta.

"Therefore, suggesting that the BoE could wind up its tightening cycle sooner than expected, having delivered a 50 bps rate hike this month," Dhwani added further. "Also, investors remain wary of the impact of the jumbo rate hike on the economic performance, as the UK economy remains on the brink of recession. All in all, the BoE did offer something for both the Pound Sterling buyers as well as sellers." 

Key takeaways from the policy statement

"CPI expected to fall significantly this year, mostly due to energy prices."

"Second-round effects on domestic wages and prices likely to take longer to unwind than they did to emerge."

"Q2 GDP seen flat quarter on quarter (May forecast: "flat"), underlying quarterly growth rate remains 0.25%."

"MPC continues to monitor closely the impact of significant increases in bank rate so far."

"Gilt yields have risen materially, particularly at shorter maturities, these suggest bank rate path averaging around 5.5% over next 3 years."

"MPC recognises it is important to consider housing rental market developments."

"MPC will do what is necessary to return inflation to 2% in medium term."

"Greater share of fixed-rate mortgages means full impact of bank rate rises will take some time."

"UK market rate expectations have risen more than for US and Eurozone, reflecting market concerns about persistent inflation more than stronger growth."

 

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The section below was published at 10:00 GMT as a preview of the Bank of England interest rate decision.

• Interest rate decision from the UK central bank is due this Thursday.
• Bank of England is set to deliver another 25 bps rate hike, raising rates to 4.75%.
• Pound Sterling is likely to witness intense volatility on the BoE policy announcements.

The Bank of England (BoE) is on track to deliver its 13th straight rate hike this Thursday, as it remains on a firefighting mission to tame stubbornly high inflation levels.

Even though inflation has softened from the double-digit figures, the United Kingdom’s consumer price inflation remains one of the highest among major advanced economies. Therefore, the main focus will remain on the language in the Bank of England’s monetary policy statement for fresh cues on its rate hike outlook, in the absence of Governor Andrew Bailey’s press conference and updated economic projections. 

Bank of England interest rate decision: What to know in markets on Thursday, June 22

• GBP/USD is consolidating the recovery gains below 1.2800, as the US Dollar (USD) licks its wounds near monthly lows after less hawkish Chair Jerome Powell’s testimony-induced sell-off.
• Testifying before the House Financial Services Committee on Wednesday, Fed Chair Jerome Powell said: “inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go," adding that "nearly all" participants expected further rate increases.
• The UK inflation data came in hotter than expected, with the Core CPI hitting the highest rate since March 1992. Investors seem to be split between a 25 bps and 50 bps, with markets now pricing in a 52% probability for a 25 bps BoE June rate hike, down from about 78% seen before the UK CPI data release.
• Markets trade with caution early Thursday amid expectations of further central banks’ tightening. US S&P 500 futures are marginally lower while the benchmark 10-year US Treasury bond yields trade close to weekly troughs near 3.70%
• The BoE policy announcements will be key to the short-term direction in the GBP/USD pair while the US Jobless Claims and day 2 of Powell’s testimony will also hog some limelight.

Analysts at Societe Generale weighed, “could the BoE raise rates by 50bp tomorrow instead of 25bp? That’s the question after the latest inflation shock in the UK this morning. Core CPI accelerated to 7.1% yoy in May, a new record high. We know from last week that wage growth accelerated to 7.2% yoy. Both numbers are moving further away from the 2% inflation target (second round effects?) so the BoE may be forced to respond.”

“The dilemma facing the BoE is whether to extend the tightening cycle by a few months or step up the pace again to reach a higher peak sooner. Both scenarios risk causing havoc in the housing market,” Societe Generale added.

When will the BoE release its monetary policy decision and how could it affect GBP/USD?

The BoE is expected to raise the key rates by 25 basis points (bps) from 4.50% to a 15-year high of 4.75% on Thursday, June 22. The interest rate decision will be announced at 11:00 GMT, accompanied by the Minutes of the meeting.

Speaking at a parliament committee last week, BoE Governor Andrew Bailey said that inflation was taking "a lot longer than expected" to come down and the labor market was "very tight". Bailey spoke after the latest data published by the Office for National Statistics (ONS)  showed that the United Kingdom’s (UK) ILO Unemployment Rate dropped to 3.8% in the quarter to April from the 3.9% recorded in the three months to March, beating the market consensus of a 4.0% print.

Meanwhile, the number of people claiming jobless benefits dropped by 13.6K in May, compared with the expected decrease of 9.6K. The UK’s average weekly earnings, excluding bonuses, arrived at 7.2% 3Mo/YoY in April versus 6.8% prior and 6.9% expected. It’s worth noting that the April data includes the impact of a 9.7% rise in the minimum wage.

The numbers caused markets to ramp up their bets on BoE rate hikes, driving two-year government bond yields to their highest since 2008. Markets ramped up their expectations for the peak in BoE rates to as high as 6.0% by early 2024.

However, raising doubts about a potential BoE hawkish rate hike, two separate surveys released a day ahead of the UK Consumer Price Index (CPI) data showed that the UK food price inflation is easing, suggesting that it may have peaked already. “The market research firm Kantar said grocery price increases eased to 16.5% in the four weeks through June 11, down from 17.2% the previous month and the lowest reading this year. Lloyds Bank Plc said production costs for UK food and drink makers fell for the first time last month since 2016,” Bloomberg reported on Tuesday.

Wednesday’s all-important UK inflation data came in hot and reinforced the narrative that the BoE will have to keep up with interest rate increases to fight sticky inflation. According to the latest data published by the UK Office for National Statistics (ONS), the United Kingdom's annual CPI accelerated 8.7% in May, at the same pace seen in April. The market consensus was for an 8.4% increase. The Core CPI gauge (excluding volatile food and energy items) increased 7.1% YoY last month, compared with a 6.8% rise seen in April while outpacing estimates of a 6.8% clip.

That said, chances for a 50 bps rate hike appear minimal, as the Bank would refrain from dipping the UK economy into recession by going for large rate hikes. Instead, markets are expecting the BoE to lean toward multiple 25 bps hikes over the course of this year. Therefore, the policy guidance and voting composition will be key to determining the next price direction in the GBP/USD pair. At the May policy meeting, two policymakers, Silvana Tenreyro and Swati Dhingra, voted to maintain rates at 4.25%.

The Pound Sterling is likely to come under intense selling pressure should the UK central bank stick to its cautious tone in the policy statement, fuelling uncertainty on the rate hike path. The GBP/USD pair is likely to correct toward 1.2600 in such a scenario. On the other hand, the major could extend the uptrend and challenge the powerful resistance at 1.2870 on a hawkish outlook.

Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD has charted out a Bull Flag formation on the daily candlesticks, awaiting confirmation on the BoE interest rates decision. The 14-day Relative Strength Index (RSI) has turned flat but remains well above the 50 level, suggesting that there is more room for the upside for Cable buyers.”

Dhwani also outlines important technical levels to trade the GBP/USD pair: “On the upside, a sustained move above the 1.2780 hurdle is likely to validate the Bull Flag, fuelling a fresh upswing toward the 14-month high of 1.2849. Further up, Pound Sterling buyers will challenge the 1.2900 round figure. Alternatively, strong support awaits at 1.2672, below which a sharp sell-off toward the 1.2600 threshold cannot be ruled out.” 

Bank of England Interest Rate related content

• Any indication that BoE is not as hawkish as expected could cause a reversal in GBP gains – Crédit Agricole
• Pound Sterling corrects as investors await key BoE Interest Rate Decision
• GBP/USD: The near-term bias is for 1.30 – ING