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BOE: More rate hikes

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The Bank of England made another interest rate increase after December, with members worried about higher inflation gaining weight, and increased borrowing costs by 25 basis points to 0.5% at the policy meeting. Progress in monetary policy and future prospects actually stem from the need for the central bank to take an aggressive stance, as they are more likely to be affected by policy- or demand-driven inflation. Some members seem to have voted for an increase of 50 basis points. BOE has highlighted the possibility of moving faster as it moves towards the equilibrium interest point at this stage.

 

It ushers in a new era in which the BOE will begin to unravel the £895 billion ($1.2 trillion) bond it has amassed over the past decade to stimulate the economy. The possibility of an increase of 50 basis points is actually radical, just like the Fed has not done since 2000, it is known that the BOE has not taken such an aggressive tightening action since 1997. There has been no consecutive rate hike since 2004. However, there is no need to explain the phenomenon that separates us from the previous post-crisis policy transformations: We can briefly summarize it as inflation.

 

We are in a situation to be much more concerned about energy externalities, because the Russian crisis has rattled benchmark prices and policymakers are still unsure whether this is a game changer. Higher fuel prices and the effect of energy input cost increased the possibility of deviation from previous projections. In the more aggressive central bank scenarios triggered by the Fed, the BOE’s December move seemed like a precautionary measure, but now it is entering similar cyclicality. BOE will stop the balance sheet expansion while raising interest rates, just like the Fed. Consecutive rate hikes are possible in the months after March. Estimates of wage increases are also getting sharper. This is where the spiral effect created by the demand-driven inflation phenomenon can come out. Because externality increases inflation, inflation accelerates wage increases, wage hikes increase fixed costs and short-term demand. Low borrowing costs also create more borrowing and demand.

 

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The annual consumer price index in the UK has risen to 5.4%. The BOE currently forecasts inflation to be slightly above target in two years and below target in three years. Markets, on the other hand, are ready to price the rate hike more steeply. Markets expect the overall interest rate in the UK to reach 1% by mid-year.

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