Bank of England’s analysis offers something for everyone, except sterling.
Bank of England's analysis offers something for everyone, except sterling.
Bank of England Rate Hike Provides Mixed Signals for Sterling
London/Amsterdam, Aug 3 (ANBLE) – The recent rate hike by the Bank of England had a mixed impact on markets, with limited comfort for the pound. While the modest 25 basis point increase soothed politicians’ concerns about borrowing costs, the central bank’s pledge to deliver more rate hikes if needed signaled a commitment to combat inflation. However, the disappointment in the pound’s initial drop suggests that the market had priced in a higher possibility of a 50 basis point hike.
The Bank of England’s decision to revert to a 25 basis point hike and keep rates elevated for an extended period due to high inflation had “something for everyone,” according to Insight Investment fixed income specialist Andy Burgess. Governor Andrew Bailey emphasized that the central bank will stick to its policy stance, even as the economy faces minimal growth in the coming years. The bank also for the first time referred to its current monetary policy stance as “restrictive.” Some investors interpreted this as a possible indication that the tightening cycle may be nearing an end, although the bank clarified that rates will remain “restrictive for sufficiently long to return inflation to the 2% target.”
The pound initially dropped, erasing all of July’s gains against the dollar and losing nearly 0.8%. Josefine Urban, fund manager at LGIM, commented that the reference to “restrictive” rates implies persistent downward pressure on the growth and employment outlook, which is unlikely to be beneficial for sterling. Money markets have adjusted their expectations of where UK rates will peak, with a significant downward shift occurring in the past couple of weeks. However, Bailey’s hawkish message indicating that it was not yet time to declare “it’s all over” failed to alter these expectations.
The Bank of England’s biggest headache remains the slow drop in UK inflation, which has permeated every area of the economy. From energy prices and groceries to wages and the service sector, price pressure has been relentless. Despite the economy narrowly avoiding a recession this year, largely due to fixed-term deals protecting consumers from the impact of rate hikes on mortgage rates, inflation remains a concern.
UK finance minister Jeremy Hunt, whose Conservative party has vowed to halve inflation by year-end, expressed relief that the Bank of England’s forecasts were predicting economic growth, even at a marginal level. He stated that sticking to the plan would result in inflation below 3% in a year’s time without the economy falling into a recession. Although consumer inflation has dropped to 7.9% (down from October’s 41-year high of 11.1%), some investors believe that the 25 basis point hike represented a missed opportunity to send a strong signal regarding the bank’s determination to fight inflation.
- S&P expects Indian economy to grow at an average rate of 6.7% u...
- Matt Damon used his first big paycheck to pay for his mom’s P...
- Why does the economy feel bad despite experts saying it’s good?
The pound has recently been one of the best-performing G10 currencies against the dollar, but its position has slipped to second place, trailing the Swiss franc. Rising gilt yields have been a key driver of sterling’s strength, attracting non-UK investors seeking relatively low-risk investments with higher returns. Two-year gilt yields have risen by over 120 basis points this year, far outpacing their US counterparts. However, the recent performance of two-year and 30-year gilt yields suggests that investors may be buying into the idea of a slowing economy and nearing the end of rate hikes, rather than expecting rising interest rates to boost the pound.
As the market focuses on how long rates will remain restrictive, the uncertainty surrounding the terminal rate becomes increasingly prominent. Investors will continue to monitor the Bank of England’s stance on interest rates and the overall economic outlook.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered as financial or investment advice. Investing in the financial markets involves risks, and individuals should seek professional advice before making any investment decisions.
