BoE: Another Dovish Hike as Expected
BoE: Another Dovish Hike as Expected
The Bank of England hiked rates by 25 bps to 1.25% last week in a move that was widely anticipated. Headline inflation is expected to move into double digits and growth is expected to turn negative in 2023. This stagflationary environment has been weighing on the GBP for some time as the BoE starts to push back against aggressive STIR market rate hike pricing. The BoE dropped its guidance from May on the future path of tightening. In May’s statement, It had said ‘some degree of future tightening in monetary policy may still be appropriate in the coming months’. By dropping this it is signaling that it doesn’t expect to keep tightening.
The BoE sees the path to lower inflation
The BoE indicated by its statement that it considers inflation will be controlled by its current rate-hiking path. The BoE stated that ‘CPI inflation was projected to fall to a little above the 2% target in two years’ time, largely reflecting the waning influence of external factors’. In other words, the cooling of the economy and high inflation will be impacted by the rise in interest rates implemented by the Bank of England.
Interest rate markets see a slower path
After the meeting markets priced in six 25 bps rate hikes as opposed to seven 25 bps rate hikes prior to the meeting. This is still steeper than the BoE is indicating, but the exact path ahead will be dependent on upcoming inflation data. On Wednesday the latest inflation data will be released. With headline inflation expected to average slightly over 10% at its peak in 2022 Q4 markets will be looking for any signs of inflation slowing. If inflation continues to rise then that means more aggressive pricing can be expected.
What this means for the GBP
With falling growth and rising inflation, the same bearish outlook remains for the GBP. The problem with chasing the GBP much lower from these levels is that the GBP is quite stretched in terms of positioning. However, any very deep dips on the EURGBP remain worth buying as it would be reasonable to expect buyers from deep value areas as marked below. You can read the full BoE statement here.
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