Sluggish Economy a Deterrent Against BOE Interest Rate Hikes

4 August 2022 – The Bank of England is set to announce its interest rate decision. The market expects the Bank of England to raise interest rates by 50 basis points today, while some think it will only raise interest rates by 25 basis points. Governor Andrew Bailey told the media that while there was “no lock-in” for a 50 basis point rate hike this week, it would be one of the options discussed before a final decision is reached tonight.

Earlier data from the Office for National Statistics showed that the UK consumer price index (CPI) rose 9.4% year-on-year in June, hitting a 40-year high. The market is worried that the upward inflation trends will persist. If the pace of interest rate hikes is not as aggressive as the market expectations of a 50 basis points hike, the pound may weaken further.

Many factors constrain the pound’s movement, and there is no guarantee that raising interest rates will boost the pound. First, the market is pessimistic about the prospects for the UK economy. The International Monetary Fund (IMF) has warned that the UK could become the G7 economy with the slowest GDP growth rate in 2023 among the seven wealthiest nations. The IMF forecasts that UK growth will fall to 0.5% in 2023, well below the 1.2% figure in April. The slow growth expectations will significantly limit the extent of the BoE’s subsequent interest rate hikes despite the extremely high inflation levels in the country. The BoE raising interest rates further could exacerbate the UK’s economic recession.

Second, inflation in the UK is still likely to continue rising. Additionally, it currently exceeds the US and Eurozone inflation figures. Ofgem had earlier suggested that more frequent adjustments to price caps would help consumers benefit more quickly from lower wholesale prices. However, such a move would also increase prices at a similar pace. Tightened gas supplies from Russia have kept UK energy prices high. The situation is likely to worsen with the onset of peak natural gas use in the upcoming winter season. The market believes that the future inflation levels in the UK will continue to soar, and the shocks to the economy will persist.

In addition, if the Bank of England raises interest rates sharply, it may increase the debt repayment pressures of the United Kingdom. Although it may not lead to a debt crisis at the moment, it will affect British consumers’ confidence and negatively affect the pound. The election of a new British Prime Minister is also the focus of market participants, especially the position of the two candidates on taming inflation. Still, the political factor will have a short-term impact on the pound, mainly depending on the US dollar’s performance.

Overall, the short-term downside risk to the pound is still relatively large. Therefore, it is difficult to say that raising interest rates will create upward opportunities for the pound. However, if the BoE takes a very hawkish stance and chooses to raise rates by 50 basis points, the pound could get a short-term boost.

However, the performance of UK economic data after the interest rate hike is something that investors must pay attention to. Whether higher borrowing rates will drag down the economy and ease inflation will be reflected in future data releases, which may cause follow-up pressure on the pound.

The US dollar constrains the pound’s current trend. The United States will release a series of economic data this week, reflecting the economic impact of the Federal Reserve raising interest rates sharply twice in a row. There is still significant uncertainty about the dollar’s prospects. In particular, the US non-farm payroll data will be released this week. Suppose the labour market data is better than expected, the Fed’s interest rate hikes will be justified, allowing the dollar to regain its upward momentum. A strong dollar would put pressure on the currencies of other countries, including the pound.

Recent News
Start Trading Now!

Try our demo account for free to learn trading. When you’re ready, switch to the live account and start trading for real.

Popular posts

ATFX

The Firm has taken the decision to cease providing services to retail clients, with immediate effect. We are therefore unable to accept any applications.

Services to professional clients will not be impacted. For professional applications please contact [email protected]

ATFX

Restrictions on Use

Products and Services on this website https://www.atfx.com/en-ae/ are not suitable
in your country. Such information and materials should not be regarded as or
constitute a distribution, an offer, or a solicitation to buy or sell any investments.
Please visit https://www.atfx.com/en/ to proceed.

ATFX

使用限制

本网站的产品及服务不适合英国居民。网站内部的信息和素材不应被视为分销,要约,买入或卖出任何投资产品。请继续访问 https://www.atfx.com/en/

ATFX

Restrictions on Use

Products and Services on this website are not suitable for the UK residents. Such information and materials should not be regarded as or constitute a distribution, an offer, or a solicitation to buy or sell any investments. Please visit https://www.atfx.com/en/ to proceed.

ATFX

Restrictions on Use

Products and Services on this website are not suitable for the UK residents. Such information and materials should not be regarded as or constitute a distribution, an offer, or a solicitation to buy or sell any investments. Please visit https://www.atfx.com/en/ to proceed.

ATFX

Restrictions on Use

Products and Services on this website are not available for Hong Kong investors and not related to any corporation licensed by the Securities and Futures Commission in Hong Kong.

All the information and materials posted on this website should not be regarded as or constitute a distribution, an offer, solicitation to buy or sell any investments.

使用限制:本網站的產品及服務不適用於香港投資者及與任何香港證監會持牌公司無關。

網站內部的信息和素材不應被視為分銷,要約,買入或賣出任何投資產品。

ATFX

Restrictions on Use

AT Global Markets (UK) Limited does not offer trading services to retail clients.
If you are a professional client, please visit https://www.atfxconnect.com/