Written by Millan Chauhan.
Last week, the Bank of England (BoE) announced it had raised interest rates by 0.50%, the biggest increase in 27 years. UK interest rates now sit at 1.75% which is still way below the current inflation rate of 8.2%. The BoE has only increased rates in increments of 0.25% thus far since the pandemic, but has now opted for a more aggressive stance following similar moves by both the European Central Bank and the US Federal Reserve. Previous forecasts made by the BoE stated it could expect inflation to reach 11%. However, it has since revised this figure to 13%, as the cost of energy is expected to increase in the autumn. The effect of higher interest rates will increase the cost of borrowing and in theory encourage a consumer behaviour shift from higher spending to higher savings. This would then slow down the demand for goods and services and alleviate the pricing pressures we have seen over the last 12 months.
The BoE also released guidance on its economic forecasts which signalled that the UK would fall into a recession later in 2022 as shrinking demand begins to be priced into the economic data. It also stated the severity of the recession may be longer than its initial forecast.
Elsewhere, we saw the US unexpectedly add 528,000 jobs to the labour market as their unemployment rate fell to 3.5%. Treasury yields rallied strongly following the release of the economic data, in particular the 2-year Treasury which is often regarded as a proxy for interest rate expectations.