Bank of England meeting and pound Sterling exchange rate
- Federal Reserve raises economic growth forecasts but signals no interest rate rise until 2024
- Bank of England (BoE) leaves policy settings unchanged as expected
- Bank of England balances growing confidence over the UK’s economic recovery outlook with downside risks
- TD Securities forecast three scenarios for pound Sterling (GBP) exchange rates
The Bank of England (BoE) monetary policy statement and pound Sterling (GBP) exchange rates take centre stage today following Wednesday’s dovish Federal Reserve (Fed) meeting.
While the Fed raised its growth forecasts for the US economy from 4.2% to 6.5% and revised its unemployment projections lower, Fed Chair Jerome Powell insisted that it was too early to withdraw stimulus.
Fed Powell said the tightening policy was unwarranted as policymakers hadn’t seen any substantial progress on inflation and unemployment and dismissed tapering speculation.
During the 30-minute policy meeting, Jerome Powell said: “When we see that we are on track to achieve substantial further progress, then we will say so well in advance of any decision to taper.”
The Federal Open Market Committee (FOMC) also revealed that they expect interest rates to remain near zero until 2024, despite the accelerating vaccine rollout in the US and President Joe Biden’s USD 1.9TN economic booster.
Traders have now turned to the Bank of England’s (BoE) policy meeting, which commenced at 1200 GMT and will look to see what policymakers deliver regarding interest rates, economic growth prospects and future policy.
Bank of England delivers its policy decision
Today’s BoE decision comes amid growing confidence over the UK’s economic recovery outlook, courtesy of declining COVID infection rate cases, the country’s rapid vaccine rollout and expectations for a consumer spending boom come Q2 2021.
While rising yields have ignited fears over inflation running higher, financial markets widely expected the BoE to leave its main policy settings unchanged on Thursday. Most investors had also predicted growth forecasts to be revised higher – a move which could trigger bullish momentum in pound Sterling (GBP) exchange rates.
The BoE’s slashed its key interest rate is 0.1% last year due to economic fallout triggered by COVID and decided to leave interest rates on hold rates near zero during its March meeting.
Bank of England Governor Andrew Bailey also expressed confidence over the UK’s economic recovery outlook and said the economy could perform better-than-expected in the coming months.
The UK’s economic performance in January also contributed to the central bank’s decision not to ramp up its massive GBP 895BN quantitative easing programme, which has been the BoE’s stimulus weapon of choice amid the COVID-19 crisis.
Comments from policymakers on inflation and future rate moves also came under scrutiny – it seems the Monetary Policy Committee (MPC) is divided on the balance of risks around the outlook for the economy.
As financial markets are forward-thinking by nature, any indication of an earlier-than-expected hike in interest rates would have driven the British pound (GBP) higher over the US dollar (USD), euro (EUR) and other major currencies.
However, Governor Bailey has warned that new mutant covid strains risk derailing the recovery, and the MPC maintained that the “existing stance of monetary policy remained appropriate.”
What impact could the BoE meeting have on pound Sterling (GBP) exchange rates?
One foreign exchange (FX) analyst has predicted the British pound to euro (GBP/EUR) exchange rate rallying to the EUR 1.18 level in an optimistic scenario.
While the UK’s COVID vaccination programme has been a prime drive of GBP exchange rates throughout 2021, the BoE’s dismissal of negative interest rates has also been a driving force behind the UK currency’s rally this year.
If policymakers signalled a raise in the next rate move, GBP/EUR and GBP/USD were forecast to rally, especially as other central banks such as the European Central Bank (ECB) and the Federal Reserve plan to hold rates near zero for as long as possible.
Investors were relatively optimistic towards the outcome of today’s policy meeting as the British pound vs euro (GBP/EUR) exchange rate jumped to a fresh yearly best of EUR 1.1718.
Although the British pound to US dollar (GBP/USD) exchange rate is trading on a softer note during London trading hours, Cable briefly hit the USD 1.40 level earlier during the session.
However, the continued ascent in US yields has weighed on the exchange rate. Rising yields dampen overall recovery by driving finance in the economy higher. To prevent a further hike in yields, the BoE were careful to balance the improved economic outlook and the economy’s risks.
However, the central banks more dovish stance has limited upside potential in pound Sterling (GBP), which has tumbled against the US dollar (USD) and trading relatively flat against the euro (EUR).
Bank of England performed a balancing act
On Monday, BoE Governor Andrew Bailey forecast UK economic activity returning to pre-COVID levels by 2021-end, compared to previous projections for early 2022.
If the central bank were too hawkish in today’s policy meeting, policymakers would have risked running higher inflation; however, economists had warned that an overly dovish statement could upend GBP.
Earlier today, TD Securities said a dovish statement and pushback on interest rates could drag the British pound vs US dollar (GBP/USD) pair to USD 1.3740, while GBP/EUR could retreat to EUR 1.1590.
However, they had expected forward guidance from BoE policymakers to strike a balance between the brightening outlook for the UK economy and the need to monitor the situation closely, which would support GBP/EUR but leave GBP/USD relatively unchanged.
Under this scenario, TD Securities predicted the British pound to dollar (GBP/USD) pair trading around USD 1.3865 and GBP/EUR rallying to EUR 1.1760.
However, a “hawkish” shift from the central bank, which TD securities believed was 15% probable, could push GBP/USD to USD 1.3940 and send GBP/EUR to fresh yearly highs of EUR 1.18.
Although COVID triggered a 10% economic slump in the UK last year – the economy’s worst annual performance in over 300 years, with close to 25 million people vaccinated against the virus and the first phase of easing lockdown underway, hopes for a return to normality have grown.
While the BoE said the economy could see more robust growth in consumption in Q2, the central bank took a leaf out of the Federal Reserve’s playbook. It reiterated its stance on inflation, stating that the economy’s outlook remains “unusually uncertain.”
It comes after the organisation for Economic Co-operation and Development (OECD) raises its economic projections for the UK economy, upgrading growth by 0.9% in 2021.
Britain’s economy is now expected to outperform the Eurozone this year. Bank of England Chief Economist Andy Haldane also expects a consumer spending boom to be unleashed this year, given that there is more than GBP 400BN in household savings.
Andy Haldane forecasts a release of pent-up demand when restrictions on social activity are lifted and has insisted that the economy will recover at a better pace than expected.
In mid-February, Andy Haldane stated: “I think there is the potential for much more, perhaps even most, of this savings pool to leak into the economy, fuelling a faster recovery. Why? Because people are not just desperate to get their social lives back, but also to catch up on the social lives they have lost over the past 12 months.”