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Europe

Bank of England Hiked Rates Amidst Brexit Risk

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The Bank of England’s (BoE) Monetary Policy Committee (MPC) hiked interest rates last Thursday by 25 basis points from 0.5% to 0.75% on the back of a strong labor market and credit growth. The decision was made despite economic uncertainty due to ongoing Brexit negotiations.

 

This is the second time the BoE has raised interest rates since the financial crisis. The last rate hike – from 0.25% to 0.5% – happened last November. The MPC signaled that more hikes are needed, though tightening will be gradual “and to a limited extent”. The MPC kept its inflation forecast largely unchanged.

 

BoE Governor Mark Carney noted in his press conference that further rate hikes are likely – possibly three more over the next three years, to contain inflation. There was no mention of selling the £70 billion bonds bought after the Brexit vote.

 

 

This BoE decision came a day after the US Federal Reserve said that it will slowly increase borrowing costs and a week after the European Central Bank kept to its plan to end its bond-buying program this year.

 

Despite attractive dividend yield, Citi analysts remain neutral on UK equities given Brexit uncertainty, mounting economic pressures and UK mid caps facing greater exposure to the domestic slowdown. While a Brexit deal is expected to be negotiated by March 2019, much headline risk and market volatility could persist along the way.

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