BoE preview: is it time for a 50-basis point hike?
What will the Bank of England decide on Thursday after the Fed delivered another 75-bps hike last week?
Will the BoE deliver a 50bps rate hike?
The Federal Reserve (Fed) delivered another 75-basis point (bps) hike last week.
There’s not much surprise in that statement as markets were fully convinced that was going to happen. Some analysts had been anticipating a bigger hike (100bps) after the US consumer price inflation (CPI) breached the 9% barrier in June, but those expectations slowly died down towards the meeting. They were helped, of course, by the fact that two of the Fed’s most hawkish members – James Bullard and Christopher Waller – had poured cold water on the idea of a bigger rate hike, stating that 75bps would be enough.
The Fed has been on a fast rate hike journey during the summer, so this latest decision isn’t really seen as underwhelming. That said, Fed chair, Jerome Powell, did acknowledge that the Fed expects a period of ‘below trend economic growth’ which will in turn ‘soften the labour market’.
He also reiterated that bringing down inflation is the bank’s key goal as this is leading to hardship for consumers. This means interest rate hikes are going to continue, but likely at a slower pace, as consumer spending has already started to slow significantly because of tighter conditions.
Markets are now pricing in two consecutive 50bps hikes at the following meetings in September and November.
Bank of England preview
But what does this mean for the Bank of England (BoE)?
Well, despite both entities having no direct relationship with one another, the decisions one makes affect the other. Or at least it has implications in the market.
Analysts, economists, and traders have all been digesting the message from the Fed and are now looking towards the BoE meeting this Thursday.
They are likely asking themselves, if the Fed – notoriously known over the last few months as one of the most hawkish central banks within the developed economies – has started to lift the foot off the hiking pedal because of concerns about the economy, what is the BoE likely to do, given they have remained undesirably cautious all this time?
The interest rate probability chart on Reuters is currently showing an 82% chance of a 50bps hike and a 18% chance of a 25bps hike, but I believe it’s going to be a closer call than that.
Last Wednesday’s cautious tone from the Fed will have likely resonated to some extent with the BoE’s Monetary Policy Committee (MPC). That’s not to say the Fed was all caution, as it was still very stern about combating inflation and continuing the bank's rate hiking cycle, but the more cautious BoE is likely to be outweighing concerns about the economy.
That’s not to say the UK isn’t facing elevated inflation, with the June CPI reading coming in at 9.4% year-on-year (YoY), the highest it’s been in 40 years.
The Fed’s 225bps of hiking have outweighed the 115bps from the BoE since December, which has put pressure on the pair. The BoE’s tactic of slowing inflation by lowering income has been to deliver rate hikes sooner than other banks, but at a more gradual pace, and that has left the pound struggling against other currencies with more ambitious tightening policies.
A 50bps hike at this next meeting will be better for GBP/USD than just 25bps, but the upside potential in the pair is slightly limited regardless.
It’s likely to have reached 1.2280 by the time the meeting comes around on Thursday, having undone the retracement since mid-June, but there is still plenty of resistance up ahead, as evidence by the indecision in Friday’s candlestick.
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