- The Bank of England has raised rates by 50 bps, lower than other central banks.
- Investors' front-running of a potentially hawkish decision has weighed on sterling.
- Further pressure is likely on sterling due to the cost-of-living crisis.
Britain is left behind – at least in terms of raising interest rates. The Bank of England has increased borrowing costs by 50 bps to 2.25%. While that has matched economists' expectations, it has failed to meet estimates by markets.
Investors had good reasons to expect a 75 bps hike. The BOE's peers in the eurozone, Switzerland and the US have all hiked rates by 75 bps in their last decisions. To be fair with BOE Governor Andrew Bailey, a cautious move makes sense one day ahead of the government's presentation of major reforms.
The pound's fall will likely go beyond "buy the rumor, sell the fact." Here goes:
Nevertheless, the BOE is behind in the race of central banks to the top. Britain imported a significant part of consumed goods, and without aggressive rate hikes, the pound is set to continue falling.
The "Old Lady" did provide some sweets for sterling bulls: three out of nine members voted for a 75 bps hike, and the bank also announced a plan to gradually sell bonds, known as gilts in the UK. That means withdrawing money from markets, the opposite of pound printing.
Nevertheless, the bigger picture is of turbulent times for the British economy, amid political uncertainty, a choking energy crisis, and lingering Brexit issues. If that is insufficient to weigh on the pound, the BOE's relative hesitation adds to pressure on sterling.
The next big event for the currency is the "mini-budget" from UK Chancellor of the Exchequer Kwasi Kwarteng. However, supporting households with energy bills while cutting taxes 0 what seems to be the plan – is unlikely to help the pound.
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