GBP EUR Surges After Bank of England Rate Update

GBP EUR Surges After Bank of England Rate Update

The GBPEUR exchange rate surged back above the 1.1700 level again after the Bank of England maintained stimulus levels and warned of 4% inflation this winter. The bank kept interest rates near zero and refused to discuss any tapering of current support.

The GBP to EUR trades near 1.1700 despite a dip in PMI business activity data for September for the UK.

Bank of England warns of higher inflation this winter

The Bank of England released its latest monetary policy remarks and warned that inflation will rise above 4% by the end of the year, due to the energy price shock.

The Bank said the surge in gas prices are an ‘upside risk’ to its inflation projections, which were set in August and predicted 4% inflation. The Monetary Policy Committee also warned that inflation could remain above the 4% level into the second quarter of next year, which would intensify the squeeze on UK households after recent tax hikes.

The minutes of the MPC meeting said:

“CPI inflation was expected to rise further in the near term, to slightly above 4% in 2021 Q4, owing largely to developments in energy and goods prices.

The material rise in spot and forward wholesale gas prices since the August Report represented an upside risk to the MPC’s inflation projection from April 2022, and meant that CPI inflation could remain above 4% into 2022 Q2, all else equal.”

The Monetary Policy Committee voted by a 9-0 to leave the bank rate at just 0.1% at this week’s meeting, while they also voted to maintain quantitative easing bond-buying at £895bn. However, two policymakers, Dave Ramsden and Michael Saunders, voted against. They wanted to stop the QE program early, by reducing the amount of UK bond buying from £875bn to £840bn.

Nine UK energy firms fail as gas price crisis intensifies

Avro Energy and Green were the latest energy firms to collapse due to a sharp rise this year in wholesale gas prices.

A number of firms have now gone bust due to the crisis, which is affecting millions of customers across the UK but Ofgem boss Jonathan Brearley also warned that more are still at risk due to the “unprecedented” rise in gas prices. The regulator is responsible for switching customers to new providers, but consumers are likely to get a raw deal as competition in the market disappears.

Inflationary issues are feeding through to the UK economy with the latest PMI business activity data missing expectations.

The PMI numbers for the UK services sector fell to 54.6 in September from 55.0 in August, while the manufacturing sector fell to 56.3 from 60.3. Both numbers were the lowest level since the lockdown in February. Rising inflation saw companies raising their selling prices at the strongest pace since records began in the mid-1990s.

The GBP to EUR slipped below 1.1700 on the day and will use that familiar price level as an anchor for future price action in the pair.