GBPEUR: What to Expect from the Bank of England

GBPEUR: What to Expect from the Bank of England

The GBPEUR exchange rate has climbed off of the 1.15 level and traded close to the 1.16 figure on Wednesday morning. Sterling was 0.25% higher as the market gets set for another Bank of England Monetary policy statement tomorrow. The British pound was boosted this week by PMI data from the manufacturing sector, while a new poll saw the SNP party in Scotland failing to gain a majority.

GBPEUR has resistance above 1.16 and that could open up a return to the early-April highs for the year.

The economic and monetary backdrop

The Bank of England continues to hold the key interest rate at 0.1% but this is in line with other central banks as they look to lower bank borrowing and government liabilities. The bank will leave the interest rate untouched, but there was talk of negative rates at the end of 2020 and the UK’s vaccine campaign and economic strength has removed that scenario from the table.

The big development for the UK is its reopening, but also the trajectory for growth. The BoE had projected a 5% GDP figure in 2021, but latest updates from the IMF were higher at 5.3%. That has since been upped again with an EY economic club seeing 6.3% and Goldman Sachs even predicting 7%. That puts the UK recovery in the top two of G7 countries with the US.

Manufacturing figures this week were strong with PMI data showing a reading of 60.9 against forecasts of 60.7. This was also good because supply chains are stretched with some components in short supply.

For the pound, the key issue will be in employment levels and the furlough scheme is masking some underlying damage to the jobs market. Some analysts say the unemployment rate could be double its current levels. The services sector has been the key driver of this and the reopening may be slow as businesses are wary about hiring after the stop-start lockdowns and the lack of profitability.

What we can expect from the BoE

The bank will keep its rate unchanged at 0.10%, but traders are more interested in how, and when, the bank will reduce its bond buying QE measures that were ramped up in 2020.

Markets have priced in 50bp of rate hikes by the end of 2024 after the BoE’s February forecasts and it is likely that the BoE will signal the same timeframe. The bank is keen to keep markets in complacent mode, which is another coordinated central bank approach to curtail tapering fears and inflation fears.

The EY Item club which projected strong growth for the UK also said that the Bank of England, “will significantly revise up its GDP growth forecast for the UK economy in 2021”.

The BoE buys bonds at the level of £4.4bn a week and BNP Paribas said they could reduce that and still hit their projected total for the year: “A cut in the weekly buying pace to roughly £3bn/week from now onwards would allow the Bank to reach its target around the end of the year.”

ING bank said: “We’re pencilling in one, maybe two rate hikes for 2023, along with a gradual introduction of balance sheet reduction at some point in the year.”