British Pound: Hawkish BoE but Pound upside capped – Commerzbank

Michael Pfister at Commerzbank highlights that the Bank of England (BoE) delivered a hawkish rate hike, with unanimous support for tightening and one member backing a larger move. Governor Andrew Bailey signalled more hikes are likely, but gave no timetable. Commerzbank still expects the next increase in February, not December, and sees the British Pound (GBP) struggling to trade higher in the meantime.

BoE unity fails to lift Pound

"As expected, the Bank of England raised interest rates yesterday. But in contrast to the Czech National Bank, the vote turned out to be surprisingly hawkish. While two votes in favour of keeping rates unchanged had been anticipated, ultimately all policymakers voted in favour of a rate increase, with Catherine Mann even voting for a 50-basis-point increase. Mann is known for her volatile voting behaviour, meaning she may vote to keep rates unchanged next time, but policymakers generally appear more united on the risks posed by inflation than previously thought."

"In his remarks, BoE Governor Andrew Bailey emphasised that this is unlikely to be the only interest rate rise. Unless the war were to end suddenly, there is a strong case for a further rate rise."

"Despite this rather hawkish decision, the pound only benefited briefly and had to give up its gains as the day progressed. At first glance, this may seem confusing, but expectations ahead of the meeting were quite ambitious, with almost three further rate rises priced in by the middle of next year. Moreover, Bailey gave no indication of the timetable following the next rate rise."

"We remain firmly of the view that the BoE will not deliver a second interest rate rise until February rather than in December, as this would contradict its cautious approach to date. However, if the situation in the Middle East has stabilised by then and energy exports have normalised, the case for further interest rate hikes will be weaker. Until then, the pound is likely to struggle to trade any higher."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)