The Bank of England (BoE) hiked its policy rate by 25bp but it maintained guidance that further tightening “might” still be appropriate and cut its medium-term inflation forecasts. The bigger picture for the GBP remains challenging, which may not improve anytime soon, in the view of economists at HSBC.
Further decline ahead
“The BoE hiked its policy rate by 25bp to 1.00%. However, we think that the BoE has stuck to its dovish guns in many ways. First, the BoE kept its guidance unchanged. The BoE’s latest forecasts also underline the dovish case. For example, the BoE now forecasts economic contraction of 0.25% in 2023 and cuts its medium-term inflation forecast to just 1.3%, well below its 2% inflation target. These forecasts suggest that the BoE might not be able to deliver the degree of rate hikes priced by the market.”
“We think that the balance of this BoE announcement will continue to weigh on the GBP, and the bigger picture for the currency remains challenging, as domestic and external challenges may not improve anytime soon.
“The domestic outlook appears to be souring, amidst the worsening cost of living squeeze. This, alongside a worsening external picture and potential widening of the current account deficit this year, all points to ongoing GBP weakness.”
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