What Are the Expectations for the Bank of England Later Today?
Yesterday consumer inflation increased again in the UK, which means a hawkish BOE today, but GBP/USD declined so let's see where it will end
Today we have the Bank of England which is expected to deliver a 25 bps interest rate hike, which would take the bank rate to 4.75%. But, we might get a surprise, so there are several factors to take into account. First, the UK May consumer inflation CPI revealed a month-on-month increase of 0.7%, surpassing the expected 0.4%, which kept the YoY CPI rate at 8.7% instead of slowing further to 8.4% according to expectations. Furthermore, core inflation, which excludes food and energy, reached a high of 7.1% on an annualized basis.
So, there is a dilemma for the Bank of England (BOE) with the elevated inflation figures on one side, which may warrant a surprise hike of 50 bps to address inflationary pressures. On the other hand, a sudden and drastic rate hike could be interpreted as a panicked response by the BOE and could undermine market confidence in the BOE’s ability to control inflation.
Markets were strongly leaning for a 25 basis points rate hike, but now expectations are slightly towards a 50 bps increase due to the stubborn inflation. However, they acknowledge the possibility that the BoE may opt for a more cautious approach with a 25bps hike, taking into account the lag effects of previous tightening measures on inflation.
Regarding the reaction of the GBP, I think that a more aggressive stance by the BOE could initially boost the currency in the short term. However, after yesterday’s price action post-CPI, the extent of the bullish move might be limited as investors consider the potential impact of aggressive tightening on economic growth. We anticipate that GBP/USD might approach the 1.3000 level, but the sentiment could be mixed due to high inflation and perceptions surrounding the BOE’s management of monetary policy, so we might be looking to fade the initial surge.
So after all, we think that there is a possibility of a more hawkish BOE in response to the stubborn inflation numbers in the UK. But the BOE is between a rock and a hard place. Therefore, the reaction in GBP pairs will be influenced not only by the pace of the hike but also by market perceptions regarding the BoE future rate path.
GBP/USD Live Chart
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