BoE pause interest rate hikes

The big news of yesterday was that the Bank of England left interest rates unchanged at 5.25%, a day after UK inflation surprisingly fell by more than expected. The Bank’s monetary policy committee (MPC) voted 5-4, in favour of pausing, to leave the cost of borrowing unchanged. Up until the inflation figure came out on Wednesday morning, markets had forecast an 80% probability of them raising rates by 25bps. By Thursday morning, that probability had sunk to just below 50%. The decision brings an end to the longest continuous period of ‘tightening’ in the BoE history, as the MPC raised rates in 14 successive meetings. Governor Andrew Bailey, who cast the decisive vote in favour of a pause, believes that inflation will continue to fall, however, noted that if it doesn’t “there is no room for complacency”, indicating the Bank stood ready to take further action if required, i.e. not ruling our another hike down the line.

Sterling sold off after BoE announcement

As a result of this less hawkish move, sterling sold off against all currency pairs, gapping lower to 1.15 vs EUR and 1.2250 vs USD. GBP/AUD is down 1% from yesterday’s open now trading below the key level of 1.90 and GBP/NZD also down to 2.05 from yesterday’s previous high of 2.08. Should inflation continue to fall and perhaps at a faster pace than expected, this should put an end to any future ‘tightening’ and weigh heavily on sterling. On the flip side, the ending of the hike cycle could ultimately boost the UK’s economic prospects, particularly if the bank is right and inflation will return to the 2% target over the next three years.

Poor UK retail sales data weakens sterling

This morning saw some poor economic data from UK, particularly retail sales and services PMI, which has weakened sterling further. This afternoon we have US manufacturing and services data and Canadian retail sales which may cause further volatility ahead of the weekend.