Pound Sterling Advances Against Euro and Dollar on Bank of England Outcome

PoundSterlingLIVE – The was higher against the Euro, Dollar and other major currencies after the Bank of England kept at 5.25% and managed to deliver a credible message that interest rates would stay at current levels for an extended period.

The risks heading into the Bank’s November decision were that guidance would confirm higher rates were here to stay, but the message would be undermined by soft forecasts and that some members of the would vote for a rate cut.

This being considered, a 6-3 split on the MPC for unchanged rates was a ‘hawkish’ outcome, as was a lift to the Bank’s forecast for inflation in two year’s time.

The Bank raised its – which is based on the market’s current expectations for Bank Rate – to 1.90% from 1.65% in August.

This means that the Bank cannot afford to cut rates too soon. “The Committee continues to judge that the risks to its modal inflation projection are skewed to the upside,” said the Statement.

“The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures,” it adds.

The Pound to Euro exchange rate rose in the aftermath of the decision to 1.1480, the Pound to Dollar exchange rate rose to 1.2215.

“The statement rather forcefully pushed back against the prospect of rate cuts any time soon. This has both supported the pound, and reinforced our view that policy easing is unlikely to begin until late-2024 at the earliest,” says Matthew Ryan, Head of Market Strategy at Ebury.

The gains are relatively subdued and we would need to observe where they close out the day to get a real verdict on the market’s takeaway.

Elsewhere, two-year bond yields rose but soon gave back the gains, suggesting this is not necessarily a market-shifting Bank of England decision from a financial market perspective.

That being said, there were enough pessimistic forecasts pertaining to the Pound’s prospects heading into the November Bank of England policy update, and merely avoiding a selloff could be considered a ‘hawkish’ outcome from a currency perspective.

Keeping a lid on the Pound will be other aspects of the Monetary Policy Report, notably a cut to the UK’s growth forecast, implying the economy will flatline through to early 2025.

Another consideration is that the Bank forecasts inflation at just 1.7% in two years.

This differs from the already-mentioned 1.9% forecast in that it assumes interest rates will remain constant at 5.25% (recall the other forecast relies on the market’s assumption on future interest rates which will edge higher and stay high until at least Sept. 2024). Therefore, this alternative inflation forecast is not an entirely ‘hawkish’ outcome from a financial markets perspective.

An original version of this article can be viewed at Pound Sterling Live