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The Bank of England on Thursday froze interest rates at 0.5 percent – but warned borrowing costs could rise more quickly than expected to bring down inflation, sparking fresh turmoil in the markets.
The pound surged against the euro and dollar on the prospect of a rate hike as soon as May, according to analysts, with more increases likely thereafter.
That sent London’s FTSE 100 index tanking 1.5 percent, while eurozone and US markets also resumed their volatile slump on fears of tighter global monetary policy, dealers said.
The BoE’s monetary policy committee ‘voted unanimously to maintain bank rate at 0.5 percent’ and maintain quantitative easing (QE) stimulus, it said in a statement after a regular meeting.
However, the central bank also warned rates could rise sooner than expected ‘in order to return inflation suitably to target’ – and by a ‘somewhat greater degree’ than it had anticipated in November.
On a brighter note, the BoE ramped up its UK economic outlook despite Brexit uncertainty.
End of cheap money
Global stock markets have tumbled this week on fears that the US Federal Reserve would also ramp up interest rates more quickly than expected following bright jobs data.
‘Monetary policy for major central banks are slowly but surely moving towards normalisation,’ NFS Micro analyst Nick Stamenkovic told AFP.
‘The Fed is leading the way followed by the Bank of England and European Central Bank. The Bank of Japan is the odd man out but that may change later this year.
‘Investors are recognising that the liquidity support for global equity markets is starting to be removed – but talk of a bear market is premature.’
Jacob Rappaport, head of equities at INTL FCStone Financial Inc., agreed that investors now were pricing in tighter monetary policy worldwide.
‘The BoE will almost certainly increase rates in May after today’s hawkish language,’ Rappaport told AFP.
‘Their decision cannot be taken in isolation as investors globally are pricing in quicker inflation and tighter monetary policy across the board.
‘With this current selloff and subsequent volatility we are forced to question how global markets will fare against a reduction in QE, tighter monetary policy, and a weaker US dollar.’
The BoE added Thursday in its latest quarterly forecasts that British gross domestic product (GDP) was expected to grow by 1.8 percent this year.
The economy was then expected to expand by 1.8 percent again in 2019, when Britain is due to depart from the European Union. 
Previous guidance was for expansion of 1.6 percent and 1.7 percent respectively.
‘The global economy is growing at its fastest pace in seven years,’ the BoE noted, adding that expansion was increasingly broad-based and investment driven.
It also forecast Britain’s annual inflation rate to hit 2.4 percent this year before slowing to 2.2 percent next year.
The bank’s chief task is to keep inflation close to a target of 2.0 percent, while it currently stands at 3.1 percent.
‘Ups and downs in markets’
Governor Mark Carney said the bank would closely monitor the British government’s ongoing Brexit negotiations.
‘There will be ups and downs in financial markets, and the Brexit process will twist and turn before it is concluded,’ Carney told reporters, stressing any rate rises would be gradual and limited.
The pound had tumbled after Britain’s shock Brexit referendum in June 2016, but this has served to make British exports cheaper for foreign customers using stronger currencies. In turn, that stimulated economic activity.
Price rises accelerated across the UK during 2017 after Britain’s referendum vote in favour of leaving the EU pushed down on the pound, hiking the cost of imported goods.
In reaction, the BoE lifted rates in November for the first time in a decade – to 0.5 percent from a record-low 0.25 percent.