The GBP EUR exchange rate was higher by 0.25% on Thursday but had spiked higher early in the session after the double header of the European Central Bank and Bank of England rate meetings. The Bank of England surprised markets again as they hiked interest rates by 0.25%.
The GBP EUR was trading at 1.1765 but had seen a high above 1.1820.
Bank of England raise rates: ‘We have to act’
The Bank of England has moved to hike interest rates to 0.25%, saying “We have to act”.
The majority of analysts had expected the central bank to keep rates at 0.1% due to a new surge in cases triggered by the Omicron variant.
But as inflation hit its highest level since 2011, the BoE decided to act to help bring the country’s soaring cost of living back under control.
Higher gas prices and the current tensions with the largest European supplier in Russia was a key factor for the bank but food prices and other goods also played a part.
Low interest rates have allowed cheaper credit for businesses who have been struggling in the pandemic, but the bank has had to move to tackle the rise in inflation.
Hiking the interest rate may reduce some demand, but rates are still historically low.
Figures released showed a larger than expected rise in inflation to 5.1% in November, with the bank saying the decision not to raise rates was a close one. The CPI was up from 4.2% in October, driving an increase in prices for Fuel, clothing and food. Post-Brexit trade and migration blocks have also caused economic problems for the UK.
“The Committee continues to judge that there are two-sided risks around the inflation outlook in the medium term, but that some modest tightening of monetary policy over the forecast period is likely to be necessary to meet the 2% inflation target sustainably,” the BoE said today.
European central bank diverges from rate hikes
The European Central Bank has avoided taking the same path as the US and UK central banks with a rate hike.
The European Central Bank has voted to leave interest rates unchanged, saying it was “very unlikely” to raise rates at all next year, despite inflation rising to record levels.
It said it will keep rates at 0%, with its pandemic emergency purchase programme due to expire in March 2022.
Despite inflation hitting a record high of 4.9% in November, ECB board members have focused on the coronavirus and economic downturn, particularly in Germany, Europe’s largest economy.
“Inflation has risen sharply, owing to the surge in energy prices, and also because demand is outpacing constrained supply in some sectors,” ECB Chief Christine Lagarde said.
“Inflation is expected to remain inflated in the near-term, but should ease in the course of next year. The inflation outlook has been revised up, but inflation is still projected to settle below our 2% target over the projection horizon.”