British rate-sensitive assets gain post BoE’s policy decision

The Bank of England raised interest rates by 25 basis points, easing monetary tightening from its previous meeting. The key interest rate reached a 15-year peak of 5.25%, with market pricing suggesting a 50-basis point increase.

However, unlike the US central bank or the ECB, the Monetary Policy Committee (MPC) did not suggest that hikes were ending due to high inflation. The two-year yield dropped as much as 14.9 basis points and was last down 6 basis points at 4.94%.

Homebuilders and real estate companies rallied, each up around 0.75%. Bond yields moved inversely to prices. The FTSE 100 remained down 0.8%, while the mid-cap FTSE 250 edged into positive territory.

The recent fall in inflation and signs of a faltering economy allowed the MPC to revert to a 25bps rate hike in August. However, one weak data point will not be enough for the Bank to be satisfied that inflation is on a sustainable trajectory.

At least one more 25bps rate hike is expected in September, depending on inflation and labor market data. The pound fell by 0.66%, hitting a fresh one-month low after the meeting’s outcome. This softness marked a reversal, as sterling was the best performing major currency against the dollar in the first half of the year due to expectations the BoE would have to raise rates further than global peers.