Following the unexpected news from the Bank of England, Asian stocks suddenly experienced a severe drop.
The Bank of England surprised markets by raising interest rates a further 50 base points in June. This is the 13th hike by the BoE and is a sharp difference from what other central banks are trying to do.
Earlier this week, fresh inflationary data showed a worrying consumer price index. Inflation in the UK remained stable at 8.7% year-on-year, missing expectations of a drop to 8.4%.
In fact, monthly inflation rose by 0.7%, tying the hands of the Bank of England.
Despite GDP stagnation in the UK (which started in 2016 after the Brexit referendum), the Bank of England was forced to raise interest rates by a whopping 0.5%, bringing them to 5% overall. By comparison, the Federal Reserve in the United States also raised interest rates for 13 months in a row, but they currently sit at 4.7%.
In fact, the Federal Reserve and the European Central Bank are trying to pause interest rate hikes. To be fair, in the United States it’s far easier, with inflation currently down to 4%. In the European Union, where inflation sits at 6.1%, the ECB can only reduce the size of increases.
At their latest meeting, the ECB only raised interest rates by 0.25%, while the Fed paused its hawkish strategy altogether.
But the UK cannot afford to follow suit. Inflation is still far too high to even consider a pause. The results of these continued increases will be felt in the GDP performance, already a disappointing 0.1% growth in the first quarter.
Asian stocks plummet
A sudden decline in Asian stocks followed the surprisingly high Bank of England rate hike.
On Friday morning, the Hong Kong stock exchange lost 2% in its first hours, while the Japanese Nikkei fell by 1.7%.
In East Asia, a similar debate over interest rates is currently taking place. The Bank of Japan is usually extremely conservative in its hikes, using -0.1% as the rate benchmark.
But the global inflation crisis hit Japan too, with core consumer prices reaching an unprecedented 3.2% in May.
Therefore, the Bank of Japan might be forced to raise interest rates too, hence why the markets reacted negatively following the hawkish news from Britain.
In the United States, on the other hand, the US dollar gained power against the Pound Sterling. The British Pound keeps losing purchasing power, though it has slightly recovered from an all-time low in 2022.
The British economy, as well as the rest of Europe, will likely fall into a full-fledged recession soon. What remains unclear is if the United States will follow suit or will just experience a slight downturn in economic growth.