BOE Quick Analysis: Three reasons why Sterling is set to continue suffering
- The BOE has raised rates by 50 bps but has refrained from committing to more action.
- Two members have voted against raising rates at all.
- The MPC has noted that government action reduces the inflation path.
Two 50 bps rate hikes – a different outcome, and it is due to promises about the future. While the Fed wants to continue raising rates, the Bank of England has its doubts.
GBP/USD has reacted negatively to the decision, but here is why there may be more in store.
1) Conditional hikes: The BOE stated that the "majority of the Monetary Policy Committee judges that further increases in the bank rate may be required. The critical word here is the word "may." Has the "Old Lady" reached its limit at 3.50%? That would a shallow rate hike cycle.
2) Two wanted to stop right now: Two out of nine MPC members voted against raising rates at all – not even 25 bps. While one member took the hawkish stance of a 75 bps hike, the two dovish members noted weakness in the labor market. This sentiment comes just after the UK reported an increase in wages. What do they know that others do not? Such pessimism is detrimental for the Pound.
3) Inflation will not be that high: According to the BOE, the government's new Autumn Statement, the fiscal cuts will cause headline CPI to drop by 0.75% compared to previous forecasts. That means fewer rate hikes.
The BOE and its Governor, Andrew Bailey are pessimistic, adding to the gloom Britain is suffering from soaring energy bills, cold weather, and an "advent calendar of strikes." There is more room for the Pound to fall.
Author
Yohay Elam
FXStreet
Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.
