BoE’s dilemma

Today’s policy decision from the Bank of England comes hot on the heels of the US Federal Reserve’s 75 basis point hike the day before and follows a surprise 50 basis rate rise from the Swiss National Bank earlier today, with the latter also getting drawn into the inflation battle.

With the Fed going for an aggressive hike, we could well see further losses for the GBP/USD in the event the BoE does not appear very hawkish. The MPC’s decision is not an easy one. It must balance the risk of keeping inflation persistently high by not being too aggressive against an uncertain growth backdrop.

Inflation accelerated to 7.8% in the 12 months to April 2022, up from 6.2% in March. The UK jobs market is also strong enough to warrant a rate increase. The fact that the UK government provided £15bn extra government stimulus is also a reason to continue with the hikes, even if the economic outlook looks grim. We are likely to see hikes in June, August and September, but questions remain as to whether the BoE will up the pace of the hikes. A lot will depend on inflation and right now it doesn’t look like it is going down any time soon.

What’s worrying though is that several macro pointers have disappointed expectations and with inflation eating into consumers’ disposable incomes, a recession might not be unavoidable despite the government’s support. Indeed, consumer confidence remains very low, while the latest PMIs suggest a sharp slowdown in business activity is coming.

Therein lies the dilemma. If the pound gets even weaker, the UK will import more inflation as this will raise the costs of foreign goods. A stronger pound could only be achieved by more aggressive tightening.

GBP/USD holds steady ahead of BoE

The GBP/USD briefly broke the 1.20 handle a couple of days ago, before bouncing back on the expected decision from the Fed. However, it has not moved too far away. Not only is 1.20 a psychologically-important level but it is where the 78.6% Fibonacci retracement level against the rally from March 2020 comes into play. The March 2020 low itself is another 600 pips lower and that level could potentially be challenged if the disparity between the Fed and BoE grows. Meanwhile, resistance is seen around 1.2200, above which there is not much further big levels until 1.2450.

When is the BoE monetary policy meeting?

The Bank of England’s Monetary Policy Committee (MPC) will conclude its meeting on Thursday 16th June, with the statement scheduled for release at 12:00 BST. As well as the rate decision, will also get the meeting minutes and votes at the same time. There’s no press conference.

What are traders expecting from the BoE?

The market is expecting another 25 basis-point hike from the Bank of England, which would lift the benchmark Official Bank Rate (OBR) to 1.25% from the current 1.00% rate. Investors expect 75 basis points worth of rate hikes over the next two meetings. If the BoE opts for 25 this time, then 50 is likely to follow at the next meeting, bringing it closer to some of the other global central banks. Investors expect a terminal rate of around 3.25 to 3.50 percent by mid-next year. Perhaps a bit too optimistic?

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