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Updated: 16:44 13/08/22

BoE surprises markets with interest rate rise

By Michael Pinson, News Editor

16 Dec 2021

The Bank of England’s Monetary Policy Committee has surprised markets today by voting to increase interest rates. After expecting a rate rise last month the BoE failed to deliver, but has instead caught markets off guard with today’s vote despite growing concerns over the new Omicron variant.

The MPC voted 8 – 1 in favour of raising interest rates from the lows of 0.1% introduced in March 2020, to 0.25% today. This is the first rate rise for the BoE since 2018, and one of the first rate rises from a major central bank since Covid first began to spread around the world.

BoE UK Interest rates

Chart showing the UK’s Bank Rate in recent years. Image from the BoE website.

With the UK introducing new measures to reduce the spread of Omicron and reporting a record number of cases yesterday, markets had expected the BoE to hold off for more data. With many business already reporting cancellations and lower footfall, the higher interest rates will do little to help encourage consumers to spend, and will reduce business borrowing power.

With UK inflation climbing to a 10-year high of 5.1% in November however, the Bank agreed that the rate rise was needed to combat the soaring inflation. The new policy will take time to have any impact however, and will do little to comfort consumers in the coming months as they face soaring energy and food bills.

The BoE themselves forecast there is more hardship to come however, with inflation expected to hit 6% next year. Given they consistently underestimated the speed and severity by which prices would rise however, 6% could still prove optimistic. The Bank also acknowledged that Omicron will reduce the UK’s GDP growth, which was already showing signs of stalling.

The surprise rate rise has sparked debate among economists, and indeed the Banks previous policy makers. Andrew Sentence called the measures a ‘small step towards more sensible monetary policy.’ Conversely, Danny Blanchflower accused the MPC of making an ‘enormous error’ that will worsen the UK’s economic slowdown.

Whether the move proves the right choice or not, markets have undoubtedly been surprised by it, with the pound rising accordingly. After hitting a low of $1.3191 last night, it has climbed nearly two cents to a high of $1.3372 so far today.

As a result, gold and silver have found themselves pushed down by the rising pound. Both metals had seen small gains on the back of growing concerns over Omicron and rising inflation. Gold is up by 0.42% over in the US this week, but Sterling’s strength today sees gold down by 0.6%. Similarly, silver is up 1% this week in Dollars, but is ending the week flat here in the UK as a result.

Inflation therefore remains a double-edged sword at the moment for precious metals. As an inflation hedge, they benefit from eroding currency values. If central banks raise interest rates to combat inflation however, then this can take some of the appeal from non-yield assets like gold and silver. With interest rates only rising to 0.25% however, and inflation heading for 6%, gold will likely remain in high demand from investors worried over eroding savings in 2022 and beyond.
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