The GBP EUR exchange rate was -0.55% lower after the latest Bank of England policy meeting, which saw interest rates rise by another 25 bps. Analysts had been leaning towards a 50bps hike after recent comments from the bank’s governor, and another aggressive 75 bps move from the Federal Reserve. The smaller rate hike warned of higher inflation and a protracted recession.
The GBP to EUR hovered at 1.1880, following resistance ahead of 1.12000.
Bank of England predicts a UK recession later this year
The pound sterling versus the euro was lower after the Bank of England raised borrowing rates by another 25 bps.
The Bank’s Monetary Policy Committee voted by an 8-1 margin to lift rates again, and they also warned that energy price rises could lead to inflation hitting 13%.
The statement noted that next to the background of additional energy price increases, there were signs that inflationary pressures persisted and broadened to further domestically driven sectors. All in all, this meeting’s quicker pace of policy tightening assisted in bringing inflation back to the 2% target in the medium term, decreasing the threat of more long-lasting and costly cycles of tightening after.
The BoE also talked of higher wholesale energy prices feeding into the retail market and said: “The United Kingdom is now projected to enter recession from the fourth quarter of this year.”
That recession will likely drag on into the end of 2023, the most prolonged downturn since the 2008 financial crisis. The GBP v EUR is under pressure, but analysts know that Europe will be in a similar position.
UK inflation level could hit 15% next year, says Resolution
The Bank of England had said inflation would peak at 11%. However, the central bank has been wrong over inflation like other central banks.
The Resolution Foundation think tank said ahead of the BoE meeting that wholesale gas price rises could add to the pain for UK businesses and consumers and sees inflation at 15% next year.
Despite another interest rate hike today, the Resolution said that the MPC faces “a protracted period of challenging policy making”.
Jack Leslie, the senior economist at the group, said: “It is clear that current expectations for gas prices this winter are more than twice what they were before the Russian invasion of Ukraine and higher than the peak in March 2022.”
“After the Bank of England’s decision [tomorrow], attention will rightly turn back to the Government – where the new Prime Minister, whoever it is, will have to set out new ways to support families in the autumn,” Leslie added.
The BoE is moving to slow inflation, but that risks slowing the economy further, and this week’s services PMI showed a 17-month low for the UK’s most important sector. The UK numbers were better than Europe, which contracted below the critical 50 level.
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