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BoE disappoints rate hawks with a 0.5% hike but GBP rallies on inflation outlook


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Poundfall
Pound could see renewed selling pressure as it fails to deliver market expectations of a 0.75% hike - Image: Shutterstock

The pound hit its worst level since 1985 against the dollar (GBP/USD) on Thursday ahead of today's Bank of England monetary policy meeting. While that Bank failed to deliver the 0.75% rate hike the markets had been exepcting, its 0.5% hike to 2.25% still managed to support the ailing pound

Sterling had slumped as low as $1.1213 in early London trade - its worst level since March 1985. Following the decision, the pound traded at $1.1303, up 0.3% on the day.

Pound vs dollar (GBP/USD) exchange rate chart

Support for the pound did not necessarily come from the rate hike itself. The markets had been expecting a 0.75% hike - although analysts and economists had warned that markets could be disappointed.

Joshua Raymond, Director at financial brokerage XTB, had said ahead of the decision: "We are expecting a hike of 0.5%, marking the seventh-consecutive rate hike by the MPC. It may be, however, that a mere 0.5% hike could disappoint the markets and increase selling pressure on the pound."

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Energy plan to slow inflation

It appears the pound was supported by the accompanying statement from the Bank of England, noted that undercertainty around the outlook for UK energy prices had fallen, following the government’s announcement of support measures including an Energy Price Guarantee.

The statement read: "The Guarantee is likely to limit significantly further increases in CPI inflation, and reduce its volatility, while supporting aggregate private demand relative to the Committee’s August projections."

More hawkish than it seems

The nine members of the Monetary Policy Committee voted three ways: new member Swati Dhingra, at her first meeting, was the only dove, voting for a 0.25% hike; five members, including Governor Andrew Bailey, voted for the 0.5% rise; and three members (Haskel, Mann and Ramsden) voted for 0.75%.

Thus, it was a reasonably hawkish outcome and further hikes can be expected, said Paul Dales, chief UK economist at Capital Economics.

He said: "We had expected only one vote for 75bps, so this is a more hawkish result. Also, the MPC unanimously voted to start selling some of the Bank’s holdings of gilts, despite the prospect of a big increase in the net supply of gilts due to looser fiscal policy. 

"Furthermore, the forward guidance was tweaked to say that 'should the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully, as necessary'."

GBP/USD

1.08 Price
-0.740% 1D Chg, %
Long position overnight fee -0.0013%
Short position overnight fee 0.0000%
Overnight fee time 21:00 (UTC)
Spread 0.00013

GBP/JPY

156.63 Price
-0.330% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0000%
Overnight fee time 21:00 (UTC)
Spread 0.034

USD/JPY

144.68 Price
+0.410% 1D Chg, %
Long position overnight fee 0.0011%
Short position overnight fee -0.0034%
Overnight fee time 21:00 (UTC)
Spread 0.008

AUD/USD

0.65 Price
-1.010% 1D Chg, %
Long position overnight fee -0.0011%
Short position overnight fee 0.0000%
Overnight fee time 21:00 (UTC)
Spread 0.00006

Fed-supercharged dollar

Earlier the pound had floundered against a Fed-supercharged dollar, down 0.3% at $1.1213 - its lowest level since March 1985.

Indeed, the dollar was supercharged by the Fed on Wednesday - whose rate-setting Open Market Committee (FOMC) delivered a third-successive 0.75% rate hike, taking the Fed funds rate to a range between 3%-3.25%. Furthermore, its staff projections suggested further big increases to come, with the so-called 'dot-plot' chart indicating FOMC members believe the main rate will end the year at 4.4%.

In afternoon trade in London, however, the dollar had run out of fuel - particularly against the yen, as the Bank of Japan intervened in the FX market for the first time since 1998 to support the ailing yen. The dollar (USD/JPY) fell 1.6% to Y141.72

 

 

Chancellor to deliver mini-Budget

Meanwhile, a further point of risk lurks for the pound as the chancellor of the exchequer Kwasi Kwartang delivers his 'mini-Budget' on Friday. Kwarteng is expected to announce a series of measures, including tax cuts, to boost the economy.

Warnings have come from several sources, however, that the expected measures could set UK public finances on an 'unsustainable path' - creating a £60bn-a-year hole in the government's budget.

In a joint report by UK think tank the Institute for Fiscal Studies and investment bank Citi said that massive public borrowing, at a time when interest rates are rising, could push UK debt to unsustainable levels.

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