Bank of England raises borrowing costs to 15-year peak, signals rates to stay high

The Bank of England raised interest rates for the 14th time on Thursday to their highest since early 2008, and signalled borrowing costs will likely stay high for some time, which knocked the pound, but helped stocks cut some losses.

The BoE raised interest rates by 25 basis points to 5.25% and said high inflation meant it was unlikely to stop raising rates any time soon.

"Some of the risks of more persistent inflationary pressures may have begun to crystallise," the BoE said in new guidance about the outlook for rates.

However, with Thursday's decision, traders began to price in a lower peak in UK rates.

MARKET REACTION:

STOCKS: The FTSE 100 .FTSE traded down 0.6% on the day, having shown a loss of 0.7% prior to the rate decision.

FOREX: Sterling fell by as much as 0.7% immediately after the decision. It was last down 0.5% at $1.26485.

MONEY MARKETS: Interest-rate derivatives showed traders believe UK rates will peak around 5.69% by March, compared with an expected peak of 5.73% in the run-up to the decision.

COMMENTS:

GILES COGHLAN, CHIEF MARKET ANALYST, HYCM, LONDON:

"Today's decision was a close call, with policymakers divided between a 25bps or 50bps rate hike. Given that the latest inflation data has shown demonstrably that the Bank of England's bitter medicine is starting to work, shifting gears down to a 25bps hike was sensible."

"Despite concerns about economic growth, today's hike is yet another sign that the central bank's quantitative tightening could be nearing completion, and we should see the hiking cycle soon coming to a halt, with more modest hikes in the pipeline until then. Investors should expect some volatility in the aftermath of today's decision."

THOMAS PUGH, ECONOMIST, RSM UK, LONDON:

"The recent fall in inflation and signs of a faltering economy meant that the MPC felt it had enough room to revert back to a 25bps rise in August.

However, one weak data point will not be enough for the Bank to be satisfied that inflation is now on a sustainable trajectory. We expect at least one more 25bps rate hike in September, whether that is followed by another one will depend on the inflation and labour market data between now and then."

JOHN LEIPER, CHIEF INVESTMENT OFFICER, TITAN ASSET MANAGEMENT, LONDON:

"The relative disparity in the trajectory of future monetary policy, against a backdrop of better-than-expected economic growth data, has catalysed a rally in the UK pound this year but momentum has dwindled recently, following the latest inflation number, which came in below expectation for the first time in four months, and signs today that the bank is becoming a little more relaxed around the direction of travel."