BoE preview – rate hike pace to slow
The Bank of England is expected to raise rates by 50bps this week, but can the pound continue its recent good run against the dollar?
Bank of England to boost rates again
After November’s bumper 75 basis point (bps) hike, the Bank of England (BoE) is expected to round off 2022 with another rate hike, this time of 50bps.
November’s move was designed to both reassure markets that the BoE was determined to fight inflation, but also to indicate that the bank was considering how to slow the pace of hikes into 2023. Pushing rates to an ultimate level of 5% would result in an inflation undershoot in two years according to BoE forecasts, and so the members of the Monetary Policy Committee (MPC) were determined not to suggest that November’s move marked the beginning of a sustained period of sharp rate hikes similar to that conducted by the Fed in the second half of 2022.
A 75bps move this week would be a surprise development, but while UK inflation shows little sign of slowing down in its pace (unlike in the US), the BoE remains concerned about pushing the economy into a deeper recession. The pound has also risen, which has helped moderate the impact of imported inflation, and investors are firm in their view that a 50bps move is all that they can expect on Thursday.
Wednesday’s inflation data did show a slowing of price increases, which is enough to give the BoE cover to hike at a slower pace. Of course it is only one month’s data, but at this point the MPC will take anything they can get on this score.
Pound could struggle despite rate hike
The pound has seen a remarkable recovery against the dollar from its September low. The currency has gained over 20% from the panic low near $1.03.
But with the BoE likely to halt its hikes after February and the economic outlook still tough, the pound might struggle to maintain upward momentum. The dollar may well weaken further, helping to support GBP/USD, but unless the UK’s outlook improves materially the BoE will have to err on the side of caution.
The pair has pulled away from trendline support, so a reversal could take the price back towards $1.18 and still leave the bounce intact. Additional gains would target the May high at $1.2675.
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