UK rate hike seen as ‘as accommodative as it gets’ as BOE pushes back

(Bloomberg) – The Bank of England’s rate hike failed to support the pound, which extended the biggest drop this week among major currencies as UK policymakers challenged market sentiment on the magnitude of future increases needed to control inflation.

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The Monetary Policy Committee voted 7-2 to raise rates by 75 basis points to 3%, the highest level in 14 years. But in an unusually direct comment on investors’ forecasts for future hikes, he said peak rates will be “lower than prices set in financial markets”.

“It’s as accommodative a hike as you can get,” said Axel Botte, global strategist at Ostrum Asset Management. It is “quite unusual for a central bank to comment so bluntly on market rate expectations,” he said.

The pound was already down in Thursday’s session after hawkish comments from US Federal Reserve Chairman Jerome Powell on Wednesday lifted the US currency. The pound extended its slide after the BOE’s decision, trading more than 2% lower at $1.1157, the lowest since Oct. 21. The currency is poised for a 3.7% fall in the week. Yields on short-term government debt fell after the decision, while longer-term yields climbed.

Here’s what strategists and economists have to say:

Jane Foley, Senior FX Strategist, Rabobank:

“The result is that today’s decision was seen as a dovish rise by the markets and once again sterling is reacting to the Bank’s gloomy projections, rather than the fact that the Bank Rate is now higher – albeit at a level that was already in the price.

Jordan Rochester, currency strategist at Nomura Holdings Inc.:

“We have $1.05 by the end of the year, based on lower global growth, and the BOE is helping us here. The difference with Powell last night is stark: Europe — “we have to walk” and we don’t like it, compared to the United States — “stop telling us we’re pivoting!” »

“If you’re buying GBP here, it’s because you think 1) US core CPI is decelerating a lot (the year of upside surprises is over) or growth is rebounding, 2) energy will crash (frontline natural gas goes up again), 3) peace in Ukraine (if noise around nukes increases), 4) UK assets look cheap – I would worry about the risks of UK credit here, insolvencies are up to 2008 levels.”

Antoine Bouvet, senior rate strategist at ING Bank NV:

“It seems like every time there’s a gilt selloff, the back end is lagging. It always feels like it’s the weak point on the curve. This despite the fact that the BoE doesn’t sell gilts into the industry as part of QT, so at least that justifies their decision to focus on shorter tenors.

Jamie Dutta, Market Analyst, Vantage:

“The difference in rhetoric between yesterday’s Fed meeting pushing the peak rate higher and today’s BOE decisions pushing market prices lower is striking. GBP/USD rolled and fell by three major digits since Fed Chairman Powell began his press conference.The bears will target 1.10 in the near term.

Valentin Marinov, Head of G10 Currency Research at Crédit Agricole:

The BOE “sends a clear signal that the path of the discount rate expected by the markets ahead of the policy meeting is too high. The result contrasts sharply with Fed Chairman Powell’s hawkish message yesterday and could trigger a further decline GBP-USD rate spread, adding to headwinds for GBP/USD.

Hugh Gimber, global market strategist at JP Morgan Asset Management:

“A more modest rise today, as inflation pushes even further into the double digits and following aggressive action by the Federal Reserve and the European Central Bank, would have risked reigniting questions about the credibility of the Bank and increased volatility in sterling markets All eyes will now be on the November 17 budget statement, where the Chancellor will have to strike the right balance between supporting the economy and a credible medium-term plan for debt consolidation.

Axel Botte, Global Strategist at Ostrum Asset Management:

“This is as accommodating a hike as it gets. The BoE seems to discount the inflationary impact of the current fiscal stance (albeit revised, still much easier than in August when it released the last inflation report). It is quite unusual for a central bank to comment so harshly on market rate expectations. Too accommodating, QT will put some pressure on the intermediate links. Inflation expectations will rise further.

Dan Boardman-Weston, CEO and Chief Investment Officer at BRI Wealth Management:

“The Bank has a difficult balancing act, however, as the current cost of living crisis combined with higher interest rates and higher taxes means the growth outlook for the UK is bleaker than it was. have not been since the dark days of Covid, and we are likely to see a continued slowdown in economic activity over the next few months.

“Inflation continues to be largely supply driven and interest rate increases will not contribute to these inflation contributing factors. While we have more political stability than we have had since few months, the economic instability unfortunately continues.

Marc Ostwald, Chief Economist and Global Strategist at ADM Investor Services Int:

“I would say the forecast is even more dire than expected, but so far the market peak assumption has only pulled back a slight peak of 4.6% from 4.7% before the meeting. I think it also reflects the fact that it’s all still really dependent on what happens fiscally It’s fine for Sunak and Hunt to talk about fixing the funding gap but the backbenchers will vote they for this level of austerity with an election only 2 years away?

Jeremy Batstone-Carr, European strategist at Raymond James:

“There is no doubt that we are now looking down the barrel of a recession, which is unfortunately a necessary by-product of the policies needed to restore fiscal credibility. The goal is long-term stability, as emphasized yet the start of the Bank’s quantitative tightening, with the Bank hoping the economy will emerge from recession around this time next year.

Tim Graf, Head of EMEA Macro Strategy, State Street:

“We doubt we will see any further hikes of this magnitude. Data capturing consumer activity is already showing signs of significant weakness and the all-important housing sector will surely become more vulnerable as rates rise more rapidly. terminal rate pricing closer to 4.00-4.25% (vs. 4.75% pre-meeting) now seems the most likely end state for policy rates, implying more modest tightening ahead.

(Adds strategist comments)

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