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Bank of England expected to leave interest rates unchanged as markets look for signs of policy pivot – Crypto News
- The UK central bank is likely to extend the pause on “Super Thursday,” in its first meeting of 2024.
- The Bank of England could hold its restrictive bias, pushing back against early rate-cut bets.
- BoE Governor Bailey’s words and updated forecasts set to inject volatility in the Pound Sterling.
The Bank of England (BoE) is set to hold its policy rate for a fourth meeting in a row on “Super Thursday.” It will be the United Kingdom (UK) central bank’s first policy meeting of 2024, and it is expected to set the direction for the Pound Sterling (GBP) market in the months to come.
Bank of England to hold fire as Bailey takes center stage
The Bank of England is expected to leave the benchmark interest rate unchanged at 5.25% following its policy meeting on Thursday at 12:00 GMT. It’s a so-called “Super Thursday” as the policy announcements will be accompanied by the Monetary Policy Report (MPR) and followed by Governor Andrew Bailey’s press conference at 12:30 GMT.
Markets are currently pricing in about 100 basis points (bps) of rate cuts this year, beginning in the second quarter.
The BoE is seen maintaining its restrictive stance, affirming the narrative of “higher interest rates for longer” while resisting the market’s expectation of early rate cuts. A surprise uptick in the headline annual inflation for December, escalating Middle East geopolitical tensions and the impending impact of higher borrowing costs could dissuade policymakers from leaning in favor of a dovish policy pivot, as yet.
While testifying before the UK Treasury Select Committee (TSC) in early January, BoE Governor Andrew Bailey said “as best as we can tell from the monitoring, we have seen that shipping traffic is being affected and rerouted. That will increase shipping prices and costs. Initially, that will be an issue in the monetary policy world and then may feed through into the financial stability world.”
Meanwhile, BoE Deputy Governor Sarah Breeden said following the December policy meeting that “it’s important for the monetary policy to be restrictive for an extended period.”
Heading into the BoE’s “Super Thursday”, the UK annual inflation stands at 4.0%, having rebounded from November’s more-than-two-year low of 3.9%. Britain’s Gross Domestic Product (GDP) expanded by 0.3% in November after October’s 0.3% decline. Meanwhile, the S&P Global UK Preliminary Services PMI surged to an eight-month high of 53.80 in January from 53.40 in December. Recent data reaffirms a continued bounce in the UK economic activity, allowing the BoE to keep the borrowing costs higher for a longer period.
The focus, however, will also be on the central bank’s updated inflation and growth forecasts, as well as Bailey’s press conference, for fresh insights on the timing of the BoE’s policy pivot. In its November MPR, the BoE Monetary Policy Committee (MPC) said it expected GDP growth to be “broadly flat” in the fourth quarter of 2023 and over coming quarters. It was most likely CPI inflation would return to the 2% target by 2025, the report said.
Previewing the BoE events, analysts at Goldman Sachs noted, “We expect the growth projections in 2025 and 2026 to be revised up. The BoE will revise down its near-term inflation forecasts because of softer consumption data and lower energy prices, with 2% CPI hit by the end of this year – and this may allow for rates to be cut by the spring.”
“We continue to expect the first 25bps cut in May, followed by 25 bps cuts every meeting until Bank Rate reaches 3.0% in May 2025. An earlier cut in March cannot be ruled out entirely, especially if the disinflation process is coupled with further deterioration in growth,” the analysts added.
How will the BoE interest rate decision impact the GBP/USD?
If the Bank of England adopts a dovish stance, in the face of downward revisions to the inflation and growth outlook, the odds for a May rate cut would spike and smash the Pound Sterling across the board. A dovish vote split could also add to the bearish bias in the GBP/USD pair. On the other hand, the pair could see a solid recovery rally should the BoE maintain its hawkish rhetoric.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “Having failed to resist above the critical 21-day Simple Moving Average (SMA) at 1.2705, GBP/USD is testing the 50-day SMA support at 1.2677. The 14-day Relative Strength Index (RSI) has breached the midline for the downside, suggesting a negative near-term outlook for the major.”
Dhwani also outlines important technical levels to trade the GBP/USD pair: “Strong support aligns at the January 17 low of 1.2595, below which a drop toward the 200-day SMA at 1.2562 cannot be ruled out. Deeper declines will open floors for a test of the 100-day SMA at 1.2467. On the upside, Pound Sterling buyers need to recapture the 21-day SMA at 1.2705 on a sustained basis for meaningful bullish traction toward the previous week’s high of 1.2775. The next upside barrier is envisioned at the 1.2800 round level.”
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.
