Overnight, the Bank of England raised its Bank Rate for the fourth meeting in a row - in line with expectations by 25bps to 1.00% - as UK inflation is now running at 7.0%, far above its 2% target. But the BoE’s bleak outlook caused the GBP to tumble from over 1.26 in mid-week to below 1.24 against the USD as the first chart shows.
Source: Bank of Singapore, Bloomberg.
First, the UK’s very uncertain situation caused the BoE’s nine Monetary Policy Committee (MPC) members to split with three voting for a hawkish 50bps hike to curb inflation. The second chart shows consumer prices are rising by the fastest pace for three decades owing to supply chain disruptions from reopening and the shock to food and energy prices from the war in Ukraine.
Source: Bank of Singapore, Bloomberg.
However, other dovish officials dissented from the BoE’s forward guidance issued after the meeting ‘that some degree of further tightening in monetary policy may still be appropriate in the coming months.’ This suggests two or three policymakers will not vote for more rate hikes now as they expect UK growth to slow rapidly as consumers are squeezed by sharply higher commodity and goods prices.
Second, the BoE’s new forecasts were highly discouraging.
The central bank now sees inflation peaking above 10% in 2022 before falling over 2023 and 2024 to 1.5%, below its 2% target, as UK growth plunges. The BoE still expects firm GDP growth of 3.75% this year as the UK fully reopens from the pandemic. But it now projects the economy to contract by -0.25% in 2023 and barely grow by 0.25% in 2024. Thus, the BoE’s base case sees clear stagflation over the next couple of years.
We expect this year’s inflation surge will make the BoE increase its Bank Rate again by 25bps in June and August before pausing at 1.50% as growth weakens. In contrast, we forecast the Federal Reserve will make at least two more 50bps rate hikes over the summer and end the year with its fed funds rate at 2.50-2.75%. We thus stay bearish on the GBP, seeing further declines to 1.21 against the USD over the next three months, to reach the bottom of a likely near-term range of 1.20-1.25 versus the greenback.
Banner image source: AFP
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