Bank of England, ECB each deliver 50-basis-point rate hikes

The Bank of England raised interest rates to 3.5% on Thursday, delivering a 50-basis-point increase amid a warning of a "prolonged period" of recession, while the European Central Bank also announced a 50-basis-point hike.

The BOE's monetary policy committee, which sets policy to meet a 2% inflation target, voted by a 6-3 majority to increase rates by 50 basis points at a meeting on Wednesday. Two members of the committee voted to maintain rates at 3% and one member preferred a 75-basis-point hike, an update said.

The bank said the U.K. economy is set to be in a recession "for a prolonged period," while inflation is expected to remain "very high in the near term" before falling sharply starting mid-next year.

U.K. inflation is currently 10.7%. Global inflationary pressures also remain elevated, the bank said.

The update added that a tight labor market, along with inflationary pressures in domestic prices and wages, "justifies a further forceful monetary policy response."

The committee also warned that, should be U.K. economy evolve broadly in line with projections, further hikes may be required in order to return inflation to its target.

The latest increase is the BOE's ninth in 12 months and followed a 75-basis-point hike in November.

The bank's committee is "in an increasingly tough spot as the emerging recession and financial stability concerns are balanced against ongoing wage pressures which risk embedding inflation," Hussain Mehdi, macro and investment strategist at HSBC Asset Management, said in an emailed comment. "This is reflected in today's wide range of voting decisions. A downshift to 0.5% is sensible and we think the MPC will tread a more cautious path in 2023 as it assesses the impact of previous tightening on a weakening economy," he said.

Seema Shah, chief global strategist at Principal Asset Management, said in a separate comment that while the hike was in line with expectations, "the tightness of the labor market and resulting wage pressures argued for a larger hike."

Ms. Shah added that the split in the committee regarding votes on whether to hike and by how much "doesn't provide the impression of clarity, credibility or stability that the U.K. desperately needs right now."

Also Thursday, the European Central Bank warned of further interest rate hikes to combat high inflation as it unveiled a 50-basis-point rise for the region's key rates.

The ECB's governing council increased the interest rate on its main refinancing operations to 2.5%, on its marginal lending facility to 2.75% and on the deposit facility to 2%, effective Dec. 21.

The ECB raised rates, and expects "to raise them significantly further because inflation remains far too high and is projected to stay above our target for too long," ECB President Christine Lagarde said in a news conference.

Inflation in Europe was an estimated 10% in November, down slightly from October's 10.6%.

The ECB also said it would begin reducing its asset purchase program at an average of €15 billion ($15.8 billion) per month, starting in March and ending in the second quarter. It will then determine a subsequent pace of bond sales.

The ECB expects inflation to end 2022 at 8.4%, falling to 6.3% in 2023 and declining "markedly" to an average of 3.4% in 2024 and 2.3% in 2025.

European growth is expected to be 3.4% this year, 0.5% in 2023, 1.9% in 2024 and 1.8% in 2025.

The 50-basis-point hike was well anticipated, said Altaf Kassam, Eurpe, Middle East and Africa head of investment strategy and research at State Street Global Advisors, in an emailed comment. However, "stubbornly high" core inflation had indicated a 75-basis-point hike, he said.

SSGA executives expect the ECB to retain its pace of rate rises until mid-2023, with no cuts likely before 2024.