03.02.2022 – The Bank of England has once again raised interest rates. And above all, it exceeded the expectations circulating in the market about a new, hawkish line. With which London is likely to lead the way for other central banks. The pound has risen sharply in the meantime. We shed light on the background.
January was a wonderful month for bears. And a horror for bulls. The S&P 500 – down 5.3 percent – and Nasdaq – down 9 percent – posted their worst stock market month since March 2020. Even the recent countermovement isn’t helping much. We hope that you were right with your trades in the wild back and forth. But where do we go from here?
That was close
All buckle up for the liftoff: The British monetary guardians have raised the key interest rate by 25 basis points to 0.5 percent. The rate hike is the first double rate increase since 2004 and was expected by the market. However, the details were a surprise: Four out of nine central bankers on the Monetary Banking Committee (MPC) wanted the rate to rise by as much as 0.5 percent. So only a slim majority was in favor of the smaller move – this majority could quickly topple, leaving room for surprises in the future. GBPUSD jumped from 1.3540 to 1.3630 before traders cashed out.
There is more to come
In addition, the BoE will shrink the balance sheet, here are about 895 billion pounds in government bonds, accumulated over a decade under quantitative easing. The tapering is scheduled to begin in March. All monetary watchdogs agreed that further moderate tightening was needed in the coming months. The BoE pointed to rising inflation: “the remit is clear the inflation target applies at all times, reflecting the primacy of price stability in the U.K. monetary policy framework.”
Severe inflation
Monetary policymakers believe inflation will reach 6 percent in February and March and 7.25 percent in April. That’s more than triple the 2 percent target. The MPC pointed to price risks in the energy sector and wages. This fits with a report from Ofgem, the U.K.’s energy watchdog: according to the report, the energy bill for a typical household will rise by 54 percent in April.
Literally, the Bank of England said: “The MPC judges that, if the economy develops broadly in line with the February Report central projections, some further modest tightening in monetary policy is likely to be appropriate in the coming months. The Committee continues to judge that there are two-sided risks around the medium-term inflation outlook, primarily from wage developments on the upside and from energy and global tradable goods prices on the downside.”
Our conclusion: The British are probably just the first to have to react to the inflation risks. If London raises rates faster and more than expected than the rest of the world, the pound should enter a bullish phase. In the case of the dollar and the euro, similar interest rate steps and corresponding swings in the currency market could follow belatedly. This is especially true for the U.S., where midterms are due in November – sentiment in the country is poor, mainly because of inflation. Bernstein Bank keeps an eye on the matter for you!
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