Bank of England says it “will not hesitate” to raise rates

12:15 pm Monday, September 26th, 2022

By David Milliken and Muvija M

LONDON (Reuters) -Bank of England Governor Andrew Bailey said on Monday that the BoE “will not hesitate” to raise interest rates if needed to meet its 2% inflation target, and that it was watching financial markets “very closely” following sharp moves in asset prices.

Sterling fell to a record low against the U.S. dollar earlier on Monday in Asian trading, extending losses that had accelerated on Friday after finance minister Kwasi Kwarteng gave his first fiscal statement, promising big tax cuts.

“The Bank is monitoring developments in financial markets very closely in light of the significant repricing of financial assets,” Bailey said in a statement.

“The MPC will not hesitate to change interest rates as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit,” he added.

The BoE raised rates to 2.25% from 1.75% on Thursday, and on Monday there was growing speculation in financial markets that the BoE would make an emergency rate rise – something that contributed to sterling’s recovery from its earlier low.

However, traders viewed the BoE statement has decreasing the likelihood of a move before the BoE’s next scheduled rate announcement on Nov. 3.

Sterling fell more than a cent against the dollar and interest rate swaps for one week ahead priced in substantially lower rates than immediately before.

Shortly before the BoE statement, finance minister Kwasi Kwarteng said he would publish a medium-term fiscal plan on Nov. 23, and the Office for Budget Responsibility would publish updated growth and borrowing forecasts.

Paul Dales, chief UK economist at Capital Economics, said the government and the BoE had done “the bare minimum” to try to stem the slide in the pound and government bond prices.

“It is possible that this is enough to stop the rot,” he said. “But … the markets may well need more reassurance and some actual action … details on the fiscal rules, a change in policy from the government and/or an interest rate hike from the Bank at an emergency meeting,” he added.

(Reporting by David Milliken and Muvija M; editing by William James and Alistair Smout)