• The Bank of England has raised rates by 25 bps, only the minimum.
  • BOE Governor Bailey failed to keep up with a global rush to raise rates. 
  • Sterling is set to extend its falls against most currencies. 

The tortoise stays behind – the pound fails to receive any applause for the Bank of England's slow-mo approach to tackling inflation. One day after the Federal Reserve raised rates by 75 bps and hours after the Swiss National Bank shocked with a 50 bps move, the BOE's move looks inappropriate. The move is especially striking as the bank forecasts a whopping 11% inflation rate in October. 

What about the hawkish dissenters? Three out of nine members of the Monetary Policy Committee (MPC) opted for a 50 bps hike to prevent inflation expectations from becoming embedded. However, such splits happened in the past, yet the BOE never increased borrowing costs by more than 25 bps since it gained independence in 1997. 

The reason for refraining to go aggressively against inflation stems from worries about the economy. The "Old Lady" foresees a contraction in the second quarter, perhaps the first out of two three-month periods of shrinking in economic output, which defines a recession. If Britain's labor market is struggling, wage growth could fall and consumers might become picky with prices. That would push inflation lower even if energy prices remain elevated. 

The "higher prices cure higher prices" theory serves as another reason to expect the pound to suffer. Against what currencies will sterling tumble more? The dollar, franc and commodity currencies are all backed by hawkish central banks. The SNB's surprise move – to preempt a potential rise in inflation – puts the Bank of Japan under pressure as well, despite its dovishness. 

The only currency left for sterling to battle is the euro. The European Central Bank also sticks to tradition – or at least to what it promised the public, of raising rates only in July. If the ECB were to increase borrowing costs at an ad-hoc meeting, that would make the pound the biggest loser. For now, sterling can only beat the common currency – but lose against all the rest. 

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