The Bank of England raised its key policy rate 50bps to 5%, its highest point in 15 years and the biggest increase since February. Markets had priced in only a 40% probability of a 50bps move, so market reaction to the aggressive move was swift and volatile. Today’s increase underscores the challenge central banks face in bringing inflation under control, raising rates while trying to avoid sparking a recession. Today’s hike was the second surprise central bank move in as many weeks following the Bank of Canada’s 25bps hike on June 8th.
Markets are trading in ‘risk-off’ territory following the Bank of England action. The U.S. dollar index is 0.15% with the USD higher vs. most other major currencies. Global equity indexes are in the red, in combination with a lower Mexican peso, tell-tale signs of a shift towards safety.
U.S. Treasury yields are higher in the 1-30yr tenors, responding to the potential of a new normal where central banks are ‘taking off the gloves’ in efforts to fight inflation. Fed Fund Futures continue to price in a high probability (71.5%) of a 25bps hike at the FOMCs July meeting but are now pricing in small probabilities of hikes at the September and November meetings as well.
Fed Chairman Powell will testify to the Senate Banking Panel today, following up on yesterday’s appearance before the House Financial Services Panel.