The UK central bank's decision came as a surprise, as the market had just erased expectations of a "BoE rate hike" last week. As a result, the pound rate skyrocketed.
The pound sterling rate skyrocketed in today's European session (16/December), spurred by the decision of the British central bank (BoE) which was much more hawkish than market forecasts. At press time, GBP/USD has advanced 0.8 percent to the 1.3360s range. EUR/GBP is down about 0.4 percent to the 0.8450s, while GBP/JPY is up 0.9 percent to the 152.60s.
By voting 8 to 1, the BoE Monetary Policy Committee (MPC) decided to raise interest rates by 15 basis points to 0.25 percent. The previous consensus was that the BoE would keep interest rates at 0.10 percent.
This decision came as a surprise, as market participants just removed expectations of a "BoE rate hike" last week in light of the tightening of social restrictions in the UK . The increase in interest rates this time indicates that the BoE considers the threat of a spike in inflation more urgent than the economic risks due to the Omicron variant of COVID-19. The UK inflation report published yesterday showed the pace of rising prices had reached a record high in a decade.
“The pound surged higher. (Because) the market had not previously priced in a rate hike (this month). This was a surprise given the recent Omicron attack. Most investors had already agreed with the idea that the central bank would delay a rate hike into 2022. ( Because of the shock factor) the pound should hold firm in this move," said Neil Jones of Mizuho Bank.
Bernd Weidensteiner, senior economist at Commerzbank, also commented, "Clearly, the BoE is focused on inflation even when dealing with the impact of the Omicron variance. This is an indication that the central bank is very concerned about price stability."
Moreover, the BoE hinted at the possibility of raising interest rates again in the coming months. The MPC meeting report said UK inflation forecasts would continue to rise until it peaked at 6 per cent in April 2022, making it "important in the coming months to raise interest rates to bring CPI inflation back to the 2 per cent target".
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