LONDON — The Bank of EnglandOn Thursday, back-to–back interest rate increases were imposed for the first times since 2004, and the quantitative tightening process began.

The market had expected that the Monetary Policy Committee would approve the 25-basis point rate hike. This raises the Bank Rate to 0.5% as the central bank tries to curb inflation.

It Bank fired the starting gun on rate rises in December, hiking its main interest rate to 0.25% from its historic low of 0.1%.

Data have shown that data have been available since then. U.K. inflation soared to a 30-year high in December as higher energy costs, resurgent demand and supply chain issues continued to drive up consumer prices.

Thursday’s inflation forecast by the Bank of England was raised to 7.25% (up from 6% in December)

In the meantime, labor market recovery continues to be strong with 184,000 employees added to payrolls during December. That makes total payroll employee count 409,000 higher that its pre-Covid levels.

While the Bank of England did not change its previous guidance, it continued to advise the market to expect quantitative tightening when the Bank Rate reaches 0.5%. It also decreased its target for corporate bond purchases by discontinuing to reinvest mature assets.

Kallum Pickering (Berenberg Senior Economist) suggested in a Thursday note that QT’s announcement may cause the market to be confused, despite the fact it is a reasonable course of action.

Pickering stated, “A gradual normalization in interest rate markets shouldn’t be a threat for the UK economy and its financial or banking system.”

However, he acknowledged that the market may be surprised by the timing or potential scale of the announcement, particularly as some £25 billion of gilts are due to mature in March, against a total holding of £875 billion.

U.K. equity could fall if gilt yields excessively and jump on these news. This would be considered an excessive reaction. Pickering stated that there is always the possibility of misperceived “hawkish signals”.