BOE decision - initial thoughts on £ drop

So, the pound has taken a hit post the BOE rate decision, although the MPC voted by a higher margin to hike rates, 7-2 instead of the mooted 6-3, the Bank has made it clear that it is likely to be one and done, rather than embark on a rate-hiking cycle.

So, the pound has taken a hit post the BOE rate decision, although the MPC voted by a higher margin to hike rates, 7-2 instead of the mooted 6-3, the Bank has made it clear that it is likely to be one and done, rather than embark on a rate-hiking cycle. This is a typical dovish hike, the Bank has said that any future hikes will be “gradual and limited” the BOE has also removed from its communication that it will raise rates faster than the market expects, which suggests that if we are lucky the BOE will hike rates once in 2018, which is what the market currently expects. The Bank only expects rates to rise to 1% from the current 0.5% level in the next 2 years.

The inflation report forecasts paint a mixed picture on the economic outlook. Inflation is expected to ease next year to 2.4% from 3% currently, however it is expected to remain about 2.2% for the BOE’s 3-year target. GDP is also expected to remain sluggish, 1.6% is predicted for 2018 with a mere 1.9% for 2019 and 2020 as the UK takes its first steps outside of EU membership. AT this level the bigger risks are to the upside and for a faster pace of hikes than this IR suggests, however, the market is not concentrating on this at this junction and we may see some further pound weakness in the coming hours.

Overall, the Bank may have hiked rates, but the outlook is cautious and downright weak regarding the strength of the UK economy. The BOE doesn’t look like it is going to follow the Fed and embark on a rate hiking cycle for many years yet. This hike was a mere removal of the emergency rate taken after the Brexit vote last year, which is why the pound is tanking and why GBP/USD could once again see life below 1.30 and EUR/GBP could rise above the 0.90 mark. On the bright side, a weak pound is good for the FTSE 100 which remains the only major index to be in the green so far today.

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