Bank of England hikes by 50bps

The Bank of England started raising its Base Rate back in December 2021 and has raised it in every meeting since, a seventh consecutive hike. It hiked by 50bps in August and had been widely tipped to hike by 50bps again in September. Consensus expectations have been met and a 50bps hike to 2.25% has been seen.

However, as the chart shows, the Base Rate is still well below inflation. Some had been suggesting that the BoE might be bolder today with a 75bps hike. Other central banks are being more aggressive. The Bank of Canada and the Fed both hiked by 75bps recently. Even the ECB hiked by 75bps in its latest move. 

Some of the Monetary Policy Committee (MPC) would agree. All members of the MPC voted for a rate hike, but there were three members (Haskell, Mann and Ramsden) voted for 75bps. However, interestingly there was one member (Dhingra) that voted for just 25bps. 

What does this mean?

Perhaps the market sees the Bank of England as being cautious. Hence the reaction to sell GBP (see below). However, the BoE is essentially caught between a rock and a hard place. The economic prospects for the UK economy are pretty negative. The BoE now sees Q3 GDP being -0.1% (down from the previous expectation of +0.4%). 

Given that Q2 was -0.1% that would already put the UK economy in a technical recession. If this is the case, then the UK is in a relatively worse state than all major currency countries/areas. This does not bode well for GBP moving forward.

Inflation is expected to now peak at just under 11%, staying above 10% for the rest of the year before trending lower. There are two more meetings in 2022 (in November and December). Further rate hikes will be seen. A rise to 3.00% by the year-end (+50bps in November and +25bps in December) may be the minimum to expect. The negative growth trends of economic data through the autumn will likely determine how much the BoE can stomach.

Initial Market Reaction

GBP initially spiked lower. A quick retracement has once more seemingly allowed more sellers to join in.

  • GBP/USD has dropped -50 pips from 1.1350 to 1.1300. A retreat back towards the earlier low at 1.1211 is likely to be seen in due course. 

EUR/GBP has rebounded by c. +40 pips from 0.8690 to 0.8730. The trend of recent days has seen EUR/GBP slipping lower. However, this renewed GBP selling may turn that tide once more.

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