During the June meeting, the Bank of England decided to raise the base interest rate by 25 basis points, as a result, the bank rate increased from 1% to 1.25%. By the way, this is happening amid a slowing economy in the country.
The British pound began to plunge even before the announcement of the results of the meeting, as the market was already waiting for a rate hike of more than 25 basis points. Confidence in such a hike among investors increased after the US Federal Reserve showed the largest rate hike on Wednesday – by all 75 basis points. This has not happened in the world's largest economy since 1994.
In addition, last week the European Central Bank announced an increase in the cost of borrowing in July and September, which is happening for the first time since 2011. It is predicted that the increase will be by 50 basis points.
In addition to this, the Swiss National Bank earlier on Thursday unexpectedly announced an increase in the discount rate by 0.5%, which is happening in this country for the first time in 15 years. The central bank of Hungary also did not stand aside and very unexpectedly raised the weekly deposit rate.
During Thursday's trading and ahead of a significant increase, the quotes of the GBP/USD pair experienced strong pressure, which caused them to decline rapidly, reaching almost the lowest level of this year – the $1.2070 mark. However, later, the British currency paired with a confident dollar suddenly moved to growth. At the time of preparation of the material, the pound was already trading at $1.2321.
It is worth saying that the pound has sunk by about 11% against the dollar since the beginning of this year due to the obvious political instability of the United Kingdom.
As for the euro, the pound also declined here, yielding to the single currency by about 0.50%. The EUR/GBP pair was trading at 0.8529 pence at the time of preparation of this review.
The decision to raise the rate by 25 basis points seemed to British officials the only right decision to curb persistently high inflation. According to forecasts of the British central bank, inflation in the country has every chance to exceed 11% in October, and the volume of GDP in the second quarter promises to decrease by 0.3%, although more recently experts predicted its growth by at least 0.1%.
The decision to raise the rate by 25 basis points was supported by six of the nine members of the Monetary Policy Committee (MPC), while three of its members were in favor of raising the rate by 50 basis points at once.
The prospects for economic growth in the UK today are considered to be among the weakest among rich countries in 2023. Consumer prices in April of this year jumped by 9% in annual terms. The price increase in the country has become a record for more than 40 years. According to data released on Tuesday, the unemployment rate rose for the first time since the end of 2020.
In such conditions, it is quite expected that consumer confidence indicators in the economy of their country decrease. However, it should be noted that consumer spending in the UK is still quite high. The decline in business confidence indices turned out to be more moderate than in the consumer sector, while the labor market remains strong, spurring price growth.
Apparently, the central bank of Great Britain intends to take all necessary measures to return inflation to the target of 2% in the medium term. At the same time, the BoE admitted that signs of more stable inflation will lead to a more active increase in the interest rate in the future.
The leadership of the British central bank noted that there were significant fluctuations in global markets after their last May meeting. For example, oil prices have become even higher, world stock indexes have declined, and the yields of most government bonds of the world's leading economies have increased significantly.