Not-So-Great Britain

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What’s going on?

The Bank of England (BoE) raised interest rates by the most in 27 years on Thursday.

What does this mean?

Five 0.25% hikes in a row from the BoE, and UK inflation still hit another 40-year high in June. So no more Mr. Nice Guy: the central bank increased interest rates by 0.5% on Thursday, with eight of its nine policymakers voting in favor of a hike that takes rates to the highest level since the financial crisis. And it didn’t stop there: the BoE also laid out plans to sell some of the $1 trillion-plus worth of bonds it’s accumulated over the years. This, after the BoE said last month that there would be no “ifs or buts” in its commitment to bringing inflation back to its 2% target, and warning on Thursday that it wouldn’t hesitate to act forcefully again if it had to.

Why should I care?

The bigger picture: It’ll probably have to…

The BoE now thinks inflation will peak at 13.3% in October, which holds water: the UK’s energy price cap is set to rise again in winter, causing the average household energy bill to increase by around 75%. And even when inflation has peaked, Brits won’t be out of the woods: the central bank is forecasting a recession in the fourth quarter of the year – one it thinks will last for the whole of 2023.

For markets: Ditch the pound.

The BoE has now joined the 70-odd central banks around the world that have now raised rates by 0.5% or more this year. But it’s still no match for the US Federal Reserve, whose back-to-back 0.75% hikes have made the dollar much more appealing to international investors and savers. The BoE’s relatively easy-does-it approach, then, might be why the British pound fell versus the dollar after the announcement.

Originally Posted August 4, 2022 – Not-So-Great Britain

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