The pound is delicately poised ahead of a key interest rate decision
Sterling has been trading more strongly against a weaker Euro, but is suffering against a stronger dollar. Tomorrow’s latest Bank of England decision could trigger some volatility.
Expectations are for a hike but the market is unclear about whether or not it will be 25 basis points or 50 basis points.
There is no doubt UK inflation is running too high, the latest reading was 7.9%. This is well above the Eurozone at 5% and the US at 3%.
Whilst a further hike is surely required, although some do dissent, the question of 50 bps could pose more danger to the economy.
It has been said the full effects of an interest rate hike can take over a year to be fully felt in the economy.
With UK interest rates having risen so much in the last 18 months, markets are fearful in some senses over what future problems are being created from having the base rate higher.
Will we see a 0.25% or 0.50% hike?
The outlook is not clear but markets might be leaning more to the 0.25% hike, because it is a slightly safer bet.
Inflation whilst clearly sticky and persistent, is coming down faster than previous forecasts, and further higher hikes could be unnecessary.
A 0.25% hike might be in line with most predictions, and could in some respects see the pound lower, as any bets of a 0.5% hike are sold off.
A 0.5% move would arguably see the pound stronger, by making the pound more attractive to hold.
However, at the last meeting, the BoE hiked more than expected and sterling struggled, as investors grew concerned at the Bank of England’s lack of control.
All in all, the BoE are appearing out of touch with the situation, and have admitted themselves they got it wrong.
Tomorrow’s decision is a key event for the pound, and any clients looking to buy or sell sterling should be aware.
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Thank you for reading and have a great day,
Jonny
