Bank of England raises interest rates to 2.25%

GBP

The Bank of England raised its key interest rate to 2.25% from 1.75% yesterday and stated it would continue to “respond forcefully, as necessary” to inflation, despite the economy entering a recession. The market reaction was to sell the pound with Sterling falling by over half a cent against the US dollar.

Against the euro the pound was little changed, possibly showing how the eurozone is in a similar position to the UK with record inflation and an economy about to go into recession.

The BoE vote ended with five MPC members in favour of a 50 basis points increase, three members voting for a 75 basis points rise and one member calling for just a 25 basis points hike.

The market had expected a more aggressive rate hike of 75 basis points following the European Central Bank and the US Federal Reserve’s move from the previous day. As a result, Sterling may experience further weakness given the BoE refuses to join its counterparts in making bolder moves.

In other news, the new Chancellor Kwasi Kwarteng has delivered the government’s mini budget in which a raft of new measures has been put together to combat the cost of living crisis but also spur economic growth in the UK. If the measures are deemed credible Sterling could hope to benefit.

Key announcements

08:15 – EUR – French Manufacturing PMI (Forecast 50.5 vs Actual 53.0)
08:15 – EUR – French Services PMI (Forecast 49.8 vs Actual 47.8)
08:30 – EUR – German Manufacturing PMI (Forecast 48.3 vs Actual 48.3)
08:30 – EUR – German Services PMI (Forecast 47.2 vs Actual 45.4)
09:30 – GBP – UK Manufacturing PMI (Forecast 47.4 vs previous 47.3)
09:30 – GBP – UK Services PMI (Forecast 49.9 vs previous 50.9)
14:45 – USD – Flash Services PMI (Forecast 45.5 vs previous 43.7)
19:00 – USD – Fed Chair Powel Speaks