- The Bank of England has raised rates by 75 bps for the first time in 30 years.
- However, the BoE has signaled that the peak interest rate will be lower.
- Forecasts point to a more painful recession, implying softer monetary policy.
- GBP/USD has more room to fall amid the Fed/BOE divergence.
A mirror image of the Federal Reserve – explaining the decline in GBP/USD, with more to come. While the US Fed is ready to slow down the pace of rate hikes but sees a higher peak, the Bank of England has taken the other route.
The "Old Lady" opted for a 75 bps hike, the biggest move since 1992, but also added that the peak interest rate will be lower than previously thought. And these are only the headlines.
Under the hood, BoEGovernor Andrew Bailey and his colleagues painted a bleak picture. They now see two full years of a recession, up from five quarters it had forecast in August. The peak inflation rate is now 11% vs. 13% previously published. While that is good news for the economy – thanks to warm weather – it is still painful for the pound.
There is a good reason for the pound to continue falling, especially against the US dollar and the hawkish Fed. Yet listening to the BoE, there is room for falls also against the euro. The British economy is set to underperform both America and the continent in the next two years, according to the Monetary Policy Report (MPR).
All in all, while the political crisis is over, the economic one has just begun. Britain is already suffering a recession, and the pound is heading down.
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