A Hike Made For Two

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What's going on?

The Bank of England (BoE) and European Central Bank (ECB) both hiked interest rates on Thursday.

What does this mean?

This week, the Federal Reserve ticked up its interest rate dial by a modest 0.25 percentage points, but the Bank of England and the European Central Bank had different plans: they surged ahead with more aggressive hikes of 0.5 percentage points, leaving the UK’s at 4% and the eurozone’s at 2.5% – their highest rates since the era of the financial crisis. Still, their plans for the future were poles apart: while the BoE said it would only increase rates again if there were signs inflation wasn’t budging, the ECB struck the most aggressive stance of all three central banks, insisting more aggressive hikes were needed and even promising another big one next month.

Why should I care?

For markets: Sliding sterling.
The BoE’s comments suggest rates could stay put at 4%, never to hit the 4.5% peak markets were expecting. And since higher interest rates makes a country’s currency more attractive to international savers and investors, that news meant the British pound dropped against the euro when news broke. And that downward trend could well continue, with the ECB likely to outhike the BoE over the coming months.

The bigger picture: What goes up…
Thing is, interest rates in the UK and US may not stay at these levels all that long, with traders betting that the BoE and Fed will cut them back down later this year. After all, inflation should be well on its way down by then, and shoring up flagging economies might be a priority once more.

Originally posted as part of the Finimize daily email.

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