Please ensure Javascript is enabled for purposes of website accessibility

Bank of England hikes by 25bps

Daniel Richards - MENA Economist
Published Date: 17 June 2022

 

  • The Bank of England hiked its benchmark bank rate by 25bps to 1.25% yesterday, the highest level since 2009. The move was widely anticipated and leaves it lagging behind the Federal Reserve by some measure on the monetary tightening stakes following the 75bps hike in the US the previous day. The decision was carried by a 6-3 majority, with three MPC members calling for a bigger 50bps hike as they argued that frontloading would ‘reduce the risks of a more extended and costly tightening cycle later.’ Nevertheless, while the 25bps hike was smaller than its peers, Governor Andrew Bailey did raise the prospect of greater hikes down the line, saying that the bank would ‘if necessary act forcefully in response’ to persistent inflationary pressures. The BoE has been trapped between accelerating inflation – its forecast for peak price growth this year was revised up to 11% – and a deteriorating growth outlook for the UK. GDP contracted m/m in April in data released earlier this week, and a nationwide rail strike next week is still likely to go ahead as things stand.
  • By contrast to the comparatively soft hike by the BoE, the Swiss National Bank made a 50bps hike yesterday, taking its benchmark rate to -0.25%. This confounded expectations for another hold by the usually dovish central bank and marked the first time it had hiked rates in 15 years.  
  • Following the emergency ad hoc meeting by the ECB as it looked to dampen the widening spreads on the European bond market, Christine Lagarde has reportedly told finance ministers from the single currency bloc that the new anti-fragmentation mechanism would come into effect if borrowing costs for peripheral states rose too far too fast.
  • Initial jobless claims in the US in the week to June 11 were 229,000, down modestly from the downwardly revised 232,000 the previous week but higher than expectations of 217,000.

Key economic data and events today

17:15 US industrial production, m/m, May. Forecast: 0.4%

Fixed Income

  • US Treasuries rallied for a second day running as some housing data came in softer than expected, a trend that may persist now that the Federal Reserve is pushing forward with a much higher rates trajectory. Yields on the 2yr UST fell almost 10bps to 3.0933% while the 10yr UST yields sank 9bps to 3.1952%.
  • European bonds were generally weaker overnight though the scale of the move was more limited compared with recent performance. Bund yields added 7bps to 1.706% while gilt yields rose 5bps to 2.513%. ECB President Christine Lagarde reportedly told eurozone finance ministers that new crisis tools would be deployed to prevent a blowout in spreads for peripheral economies.

FX

  • The dollar sold off heavily against peers overnight with a surprise 50bps hike by the Swiss National Bank providing much of the catalyst for moves lower in the greenback. Like other developed market central banks, the SNB is putting inflation fighting at the front of its agenda while also retaining the flexibility to sell CHF if the franc weakens. USDCHF dropped by 2.8% to 0.9666 while the door to EURCHF parity may be open. EURUSD added 1% overnight to 1.0549 while GBPUSD added 1.4% to 1.2352, though it initially sold-off in response to the Bank of England hiking rates by 25bps. USDJPY fell by 1.2% to 132.21.
  • Commodity currencies showed a mixed performance with USDCAD moving higher, up by 0.46% to 1.2950 while AUDUSD rallied 0.6% to 0.7047 and NZDUSD added 1.15% to 0.636.

Equities

  • The post-FOMC rally in equity markets was short-lived and global indices sold off again yesterday as recession fears returned to the fore. In the US, the NASDAQ dropped -4.1%, followed by the S&P 500 (-3.3%) and the Dow Jones (-2.4%). In the Europe, the CAC, the FTSE 100, and the DAX dropped -2.4%, -3.1% and -3.3% respectively.
  • Locally, the DFM closed down -1.7% and the ADX -0.8%. The Tadawul closed -1.3% lower.

Commodities

  • Oil prices edged back higher overnight with Brent futures gaining 1.1% to USD 119.81/b and WTI up by almost 2% to USD 117.59/b. Immediate price moves in response to the Federal Reserve hiking by 75bps are still filtering through the market rather than being affected by any near term fundamental catalyst.

Click here to download charts and tables