BoE’s Pill says a bit more sceptical about market pricing of four rate hikes over the next year
Bank of England (BoE) Chief Economist Huw Pill said on Wednesday that he is a bit more sceptical about market pricing of four rate hikes over the next year. Pill added that UK output and labor market have proven more resilient.
Key quotes
I am a bit more sceptical about market pricing of four rate hikes over the next year.
UK output and labor market have proven more resilient.
Better forecasts still not showing runaway growth rates.
Even if AI boosts the supply side, it will take time to feed in.
Underlying UK inflation never fell enough pre-Iran shock.
Early move would've shown BoE wasn't 'holding and hoping".
It's misguided to say we shouldn't be reacting to uncertainty.
To get to 100bps we'd need more concrete evidence of risk.
Market reaction
At the press time, the GBP/USD pair is up 0.07% on the day to trade at 1.3264.
BoE’s Pill questions market’s aggressive rate hike path
FXS Speechtracker scores the speech at 7/10, slightly below the speaker’s 7.4/10 historic average, pointing to a tone that is firm but not exceptionally hawkish. Pill’s scepticism about market pricing of four hikes, emphasis on resilient UK output and labor markets, and acknowledgement that better forecasts still do not show runaway growth collectively signal a cautious, mildly hawkish stance rather than a full endorsement of aggressive tightening.
Comments that an earlier move would have shown the BOE was not “holding and hoping,” and that it is misguided not to react to uncertainty, reinforce a bias toward maintaining a tightening option while demanding more concrete evidence before moving to 100bps of hikes. The reference to underlying UK inflation not having fallen enough before the Iran shock, and the view that any AI-driven supply boost will take time, support the idea that UK rates are likely to stay elevated, which is modestly supportive for the Pound versus the Euro and the Dollar.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
