BOE Preview: A surprise 50 bps rate hike on the table?

• The BOE is likely to hike the key rate by another 25 bps to 1.25% on Thursday.
• A surprise 50 bps hike cannot be ruled out if the BOE prioritizes inflation control.
• GBP/USD has room to recover but it depends on the bank’s tightening guidance.

GBP/USD could confirm a bullish reversal from two-year troughs should the Bank of England (BOE) surprise markets by announcing a 50 basis point interest rate hike on Thursday at 11:00 GMT.  

BOE could take global central banks’ lead

Until a day ago, a 50 bps rate hike by the UK central bank could not be imagined. With the US Federal Reserve (Fed), however, now seen delivering a 75 bps rate hike at its June policy meeting, seeing the BOE going large on the rate lift-off is not unthinkable.

Adding to this, the Reserve Bank of Australia (RBA) announced a bigger-than-expected 50 bps hike earlier this month and the Reserve Bank of New Zealand (RBNZ) also hiked by a half-point. Markets have priced in a roughly 40% chance of a double-dose lift-off at the June MPC meeting.

According to the Bloomberg survey of economists, three of the BOE’s nine officials are expected to vote for a 50 bps hike, with the majority backing a 25 basis point move. Meanwhile, the latest Reuters poll of economists showed that the BOE is set to deliver a quarter-point hike on June 16 to 1.25%, its fifth consecutive rate rise. Two more are expected this year to 1.75%, which means rate increases in August and November.

I believe the main reason the BOE may opt for a  bigger rate hike is to show that it prioritizes inflation. The central bank needs to show a much stronger response to control inflation, which is likely to peak at around 10% by October.

The inflation expectations remain high, in the face of the UK Finance Minister Rishi Sunak’s £15 billion cost-of-living package, calling for a quick monetary policy response before the inflation problem gets out of hand.

Also, the fact that the public’s net satisfaction with the BOE’s control of inflation is at the lowest level ever could compel it to deal with the inflation issue head-on.

Concerns over the UK growth cannot be ruled out, as the economy heads towards the inevitable, with two back-to-back monthly negative GDP prints.

Therefore, the rate hike voting composition will hold the key alongside the central bank’s outlook on the economic growth and further policy tightening. In absence of Governor Andrew Bailey’s press conference, the central bank’s forward guidance will be closely examined.

Trading GBP/USD with the BOE

It could be a Thursday turnaround for GBP/USD bulls, as oversold conditions on the daily chart could collaborate with the hawkish 50 bps surprise from the BOE.

Therefore, an extended recovery towards 1.2300 could be in the offing on a 50 bps lift-off. However, if the central bank chooses to state a ‘gradual pace of tightening in the coming meetings or highlights growth risks, a further upside in the pair could be capped.

GBP/USD could witness a ‘sell the fact’ trading should the BOE hike the rates by the expected 25 bps. GBP could also take a beating if the MPC voting composition shows a majority voting in favor of a smaller increase.

In such a case, the pair could head back towards its multi-month lows below 1.1950. An outrightly dovish outcome could imply that the BOE is more concerned about the growing risks of recession even though inflation is broadening out.

Meanwhile, cable’s reaction to the BOE announcements could also depend on the fallout of the expected hawkish Fed decision, which could have a significant impact on the market sentiment, as well as, the US dollar valuations.