Bank of England Hikes Rates, GBP Rallies

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The Bank of England's Monetary Policy Committee (MPC) increased rates to 0.25% (from 0.1%), by an 8-1 majority, with Ms Tenreyro being the sole dissenter. The Committee voted unanimously to maintain the total target stock of asset purchases at £895 billion. [1]

It is now even more evident that the central bank and its members have communication issues. In November, they had surprised many market participants by opting to not increase rates [2], despite hinting at such. Prior to that decision, BoE's governor Bailey had signaled that the BoE would have to act in the face of rising inflation, while speaking at the G30 36th Annual International Banking Seminar. [3]

Markets were approaching today's meeting with limited expectation given November's surprise, in a backdrop of stricter Covid-19 measures in the UK to contain Omicron and recent dovish remarks by BoE's Mr Saunders.

He is perhaps the most hawkish member of the MPC and had voted against the majority in November, in favor of a rate hike, along with Mr Ramdsen.

Mr Saunders had noted on December 3rd, that "In considering if and when to adjust rates, there is always a case to wait and see more data. At present, given the new Omicron Covid variant has only been detected quite recently, there could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy", pouring cold water on calls for tightening. [4]

However, interest rate hikes seemed to be back in play, after Wednesday Inflation data. UK Consumer price Index (CPI) jumped 5.1% in November, compared to 4.2% in October. This level was not expected until April 2022 as per the last Monetary policy Report [5] and bank staff now expect inflation to peak 6% in April – 3 times BoE 2% target.

The British Pound jumped in the aftermath of the somewhat unexpected hike, with GBP/USD rallying more than 0.5% at the time of writing.


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Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 16 Dec 2021 https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2021/december-2021

2

Retrieved 16 Dec 2021 https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2021/november-2021

3

Retrieved 16 Dec 2021 https://www.youtube.com/watch

4

Retrieved 16 Dec 2021 https://www.bankofengland.co.uk/speech/2021/december/michael-saunders-speech-at-a-boe-hosted-event

5

Retrieved 23 Jun 2022 https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2021/november/monetary-policy-report-november-2021.pdf

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