Having failed to tame stubbornly-high inflation in Britain, the Bank of England opted for the element of surprise Thursday, raising its benchmark rate by a bigger-than-expected half a percentage point.
More hikes are likely on the way, and not just on that side of the pond.
Despite a trajectory of steep rate increases on par with those of other central banks in advanced economies, which have generally seen inflation in their countries ease, Britain’s core consumer price index climbed even faster in May. And while some critics blasted the central bank for jeopardizing the economy, others, like Derek Holt, vice-president and head of capital markets economics at Scotiabank, argue the risk of inflation expectations becoming unmoored is too big to ignore.
“This may not be the only 50 bps move,” he warned in a note. “Folks who think central banks won’t hike into a recession need to revisit their history books.”
The U.S. Federal Reserve may have hit the pause button when it held its target rate at 5.25 per cent last week, but Fed officials have clearly spelled out more increases are likely, with Chair Jerome Powell telling U.S. legislators Thursday that “we are close, but there’s a little further to go with rate hikes.”
As for the Bank of Canada, it like the Fed is watching a housing market rebound, brisk retail sales and low unemployment, having abandoned its own pause earlier this month and raising its target rate to 4.75 per cent.
An end will eventually come to rate increases, but we’re not there yet.
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Jason Kirby