BoE Hikes For The Second Time Since Lehman

Are there more central banks than the Fed and the ECB? Oh, yes. Last week, the Bank of England raised rates 25 basis points. What does it imply for gold?

Second Hike in 10 Years

On last Thursday, the Bank of England’s Monetary Policy Committee voted to raise its key interest rate from 0.50 to 0.75 percent. As we can read in the summary of the monetary policy meeting:

The Committee judges that an increase in Bank Rate of 0.25 percentage points is warranted at this meeting.

The move was the second hike in more than 10 years, following the 25 basis points raise in November 2017, which reversed an earlier interest rate cut made in August 2016 in the aftermath of the Brexit vote. The BoE maintained its quantitative easing program unchanged.

Moreover, the UK central bank signaled further hikes, although gradual and limited in scope:

The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

Why did the BoE hike? Well, the UK survived the post-Brexit referendum turmoil. The inflation is above 2 percent, while unemployment is low, as one can see in the charts below. With very tight labor market and rising wages, the policymakers could be afraid of the overheating of the economy, even with the uncertainty about Brexit. As we can read in the minutes:

Although modest by historical standards, the projected pace of GDP growth over the forecast was slightly faster than the diminished rate of supply growth, which averaged around 1½% per year. The MPC continued to judge that the UK economy currently had a very limited degree of slack and there were a number of signs that the labour market was continuing to tighten. The employment rate and the number of vacancies had risen to record highs, and indicators of recruitment difficulties had increased further. The unemployment rate was low and was projected to fall below the MPC’s estimate of the natural rate. In the MPC’s central projection, therefore, a small margin of excess demand emerged by late 2019 and built thereafter.