- The Bank of England will announce its monetary policy decision at 1pm
- Economists expect a rate hike of 50 basis points
- The market sees a 60 percent chance of a 75 basis point rate hike
- The market is awaiting the BoE’s comment on the new fiscal package
- Decision on active bond sale also expected
- EURGBP is trading in an uptrend channel
The Bank of England was originally scheduled to announce its monetary policy decision at 1 p.m. on Thursday of last week. However, due to the death of Queen Elizabeth II and national mourning, the decision was delayed by a week. The Bank of England already warned at its last meeting that it expects the UK economy to slide into recession in the last quarter of 2022 and that this is unlikely to stop it raising interest rates to fight inflation . .
What to expect from the Bank of England today?
There is no clear expectation of a change in today’s Bank of England interest rate. The consensus among economists is for a rate hike of 50 basis points. However, the money markets calculate with a 60 percent higher growth potential, ie with a price increase of 75 basis points. Hence the risk of surprise and scope for unexpected moves in the GBP market following the announcement. However, a lot of attention is paid to the details – the distribution of votes in the MPC and the future prospects.
Hopefully the decision will not be unanimous. While all BOE members agree that rigor is needed, some believe it should be a 50 basis point move and others believe 75 basis points is appropriate. However, there are members like Silvana Tenrero who are more inclined to raise by 25 basis points. Policies, if published, are also closely monitored. At current prices, markets see the BoE policy rate at 3.75% by the end of 2022 – 200 basis points higher than now. With only 3 sessions left including today’s session, this means that the BoE should rise by at least 75 basis points or more.
The market sees over a 60% chance of a 75 basis point rate hike in today’s session. Source: Bloomberg
A lot has happened in the area of fiscal policy since the last BoE meeting. The change of prime minister announced massive tax programs designed to support households and businesses through the coming winter crisis. How does the central bank see this? Will this reduce inflation or further increase prices? The Bank of England expects the UK economy to enter recession in the fourth quarter of 2022, so will also focus on whether valuations are changing. However, the new tax package is unlikely to halt the economic slowdown, but may lessen its severity.
The Bank of England said at its last meeting that it intends to start actively selling government bonds shortly after the September meeting. Are these plans still up to date? It is not yet certain how a new tax package will be financed. UK yields have recently fallen on anticipation of higher tax spending and the start of active bond selling will put upward pressure on them. This means that the cost of borrowing in the UK will rise, an unwelcome development for the government, which has to fund the increased spending. Therefore, there is a possibility that the BoE will delay the start of the bond sale until there is more clarity on the financial measures.
a look at the market
GBP has underperformed lately and GBP/USD has fallen to levels not seen since the 1980’s. The EURGBP market is doing a little better but recently hit a 19-month high again. EURGBP has been trading in an uptrend channel since mid-August and recently broke above 0.8720 mid-June high. The pair retested this level as support yesterday but failed to break below it, confirming the bullish bias in the market. Resistance to watch for near term is 0.8787 recent high.
Source: Xstation 5
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