British Pound edges lower towards 1.3400 as BoE Bailey buys time
- GBP/USD gives away Thursday's gains on Friday, and returns to levels near 1.3400.
- BoE Bailey has practically discarded any near-term interest rate hike.
- In the US, PCE inflation data keeps pressure on the Fed to raise borrowing costs.
The British Pound (GBP) drifts lower against the US Dollar (USD) on Friday, reaching session lows at 1.3408 so far, on track for a moderate weekly decline. Bank of England Governor Andrew Bailey has practically discarded any interest rate hike in the near future, while US data adds pressure on the Federal Reserve (Fed) to tighten its monetary policy.
Bailey affirmed at an economic meeting in Reykjavik that ”there is a case for tolerating temporarily above target inflation," and added that economic activity and the labour market are weighing on second-round effects. The BoE chied also stated that, having taken expected cuts off the table, the bank has already tightened policy considerably in response to the shock relative to what had been expected by markets.
US-Iran ceasefire extension fuels a mild appetite for risk
Sterling's downside attempts, however, remain limited, with a moderate risk appetite undermining demand for the safe-haven US Dollar on Friday. News that the US and Iran have reached a memorandum of understanding to extend the ceasefire for another 60 days and limit restrictions on sea traffic through the Strait of Hormuz has been celebrated by the market, although the agreement is still pending US President Donald Trump’s signature.
In the US, data released on Friday revealed that the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) inflation gauge of choice, accelerated to its highest levels in three years, adding strain to household incomes and economic activity.
These figures add to the case of Fed hawks and keep hopes of an interest rate hike alive. The CME’s Fed Watch Tool shows a nearly 50% chance of an interest rate hike before the end of the year.
Minneapolis Fed President Neel Kashkari, on the contrary, has cooled hopes of upcoming monetary tightening. Kashkhari warns that it is premature to conclude that the central bank will raise rates right away after April’s PCE inflation data release, and added that the Iran war has clouded the inflation outlook.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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