Sterling, government bond yields and British bank shares rose yesterday after the Bank of England increased interest rates for the first time in more than three years.
The 0.15 percentage point rise in the base rate to 0.25 per cent came as a surprise to investors, who had placed their bets on the Bank holding rates in light of concerns that the Omicron variant of Covid-19 would prompt more restrictions and hinder economic growth.
The Bank’s monetary policy committee (MPC) voted 8-1 in favour of raising the base rate from its record low, noting that although Omicron was likely to weigh on economic activity, its impact on medium-term inflationary pressures was unclear at this stage.
The pound reacted strongly to the rate rise, although it lost some of its gains later in the day. Against the dollar, sterling rose 0.4 per cent to $1.3321 and 0.4 per cent to €1.1783 against the euro.
Government bond yields spiked on the back of the announcement, with yields on ten-year gilts briefly rising above 0.8 per cent, having started the week below 0.7 per cent. However, by the close of play in London, they had fallen back to 0.765 per cent, which was above the 0.736 per cent that they were yielding at the start of the session.
Barclays shares rose 5½p, or 3.2 per cent, to 182p and Lloyds, the nation’s biggest mortgage lender, was up 2p, or 4.6 per cent, to 46½p. However, housebuilders’ shares dropped over worries that higher rates would increase mortgage costs for would-be buyers and cool the housing market. Barratt Developments, which had been 1 per cent higher in the run-up to the Bank’s announcement, closed down 2½p, or 0.4 per cent, at 720½p. Persimmon shares fell 28p, or 1 per cent, to £27.30, having been above £28 before the news broke.
The FTSE 100 closed up by 89.86 points, or 1.3 per cent, at 7,260.61. The FTSE 250 ended the day higher by 214.08 points, or 1 per cent, at 22,647.96.
Inflation figures published on Wednesday showed that prices have been rising faster than the MPC had anticipated. The consumer prices index was at 51 percent for the year to November, a level that the Bank predicted the economy would not reach until April next year. The prices of fuel, clothing and footwear rose the fastest. Reduced supplies were one cause, with a tenth of groceries either unavailable or low in stock.
Rate-setters increased expectations for inflation to peak at 6 per cent in April next year. The committee expects gas and electricity prices to fuel the rise.
Officials are concerned that the spread of Omicron could further increase inflation by constricting supply. “There was some value in waiting for further information on the degree to which Omicron was likely to escape the protection of current vaccines and on the initial economic effects of this new wave,” they said in the minutes of their meeting. “There was, however, also a strong case to tight monetary policy now, given the strength of current underlying inflationary pressures and to maintain price stability in the medium term.”
Silvana Tenreyro, an external member of the committee and professor at the London School of Economics, was the only member to vote to hold rates at 0.1 per cent because of the uncertainty posed by the Covid variant. All other members, including the governor, Andrew Bailey, voted for a rise.
Officials now expect the economy to grow by 0.6 per cent in the final quarter of this year, down from the 1 per cent forecast in last month’s report.
The interest rise is expected to be the first of several over the next few years.
Yesterday’s decision by the committee makes the Bank of England the first big central Bank in the world to increase rates since the start of the pandemic. When the institution cut the base rate to 0.1 per cent in March last year, it was the lowest in its 326-year history.
Lagarde dials down stimulus.
The European Central Bank took another step in rolling back its crisis-era stimulus yesterday but promised to hold down borrowing costs next year and even kept the door open to restarting emergency support.
With the eurozone economy near its pre-pandemic size, pressure is mounting on officials at the Central Bank to follow their peers worldwide in ending the substantial monetary stimulus. Still, any abrupt move would risk unravelling years of effort to rekindle once-anaemic inflation.
The Omicron variant of Covid-19 and supply chain bottlenecks — because of surging demand after the first lockdowns — also leave the outlook uncertain, limiting the ECB’s ability to commit. Therefore, in a decision that leaves policymakers with plenty of escape clauses to change direction, the ECB will end emergency bond purchases in March but will temporarily double the pace of its long-running asset purchase programme to ease the transition.
Christine Lagarde, president of the ECB, said: “We need to maintain flexibility and optionality in the conduct of monetary policy. However, the spread of new coronavirus variants is creating uncertainty.”
Summarised from London times, www.sba.tax
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