Bank of England review: BoE paves the way for more EUR/GBP topside
|- At today’s monetary policy meeting the BoE left the key policy rate unchanged at 5.25% whilst maintaining a data dependent forward guidance.
- With limited success, the BoE tried to push back on the market pricing of rate cuts.
- EUR/GBP ended the meeting higher and we continue to see headwinds for GBP, targeting the cross at 0.89 in 12M.
As expected, the Bank of England (BoE) decided to keep the Bank Rate (key policy rate) unchanged at 5.25%. 6 members voted for an unchanged decision, including the newest member Sarah Breeden, while 3 members voted for an increase of 25bp.
The majority of the Monetary Policy Committee (MPC) voted to keep the Bank Rate unchanged citing that GDP growth had weakened, the labour market had continued to loosen and that CPI inflation “was expected to decline significantly in the coming quarters”. Importantly, it was noted that “Bank staff estimates that more than half of the impact of higher interest rates on the level of GDP is still to come through”. The BoE reiterated that that “monetary policy will need to be sufficiently restrictive for sufficiently long". The BoE retained its forward guidance repeating that “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures”.
In the press conference Governor Bailey tried to push back expectations on rate cuts - stating that it was “much too early to be thinking about rate cuts” - in order to prevent financial conditions from easing prematurely. However, with lower GDP and higher unemployment forecasts alongside other indications that the UK economy increasingly looks fragile, markets were not buying the narrative. Likewise, coupled with global momentum and more rate cuts being priced in for peers, this is spilling over to the BoE pricing (in line with our call). We think the potential for further BoE rate hikes has fallen following today’s message and we maintain our call that the peak in policy rates has already been reached. We expect the UK economy to show further signs of weakness, inflation to level off and wage growth to have peaked.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.