Bank of England’s November Decision and Pound’s Resilience
The British pound could weather the Bank of England’s (BoE) November interest rate decision without major turbulence if the Monetary Policy Committee (MPC) refrains from voting for a rate cut and if inflation and growth forecasts remain relatively stable.
Anticipating no change in interest rates comes as no surprise to financial markets, and therefore, the actual rate decision itself is unlikely to have a significant impact. Instead, what is expected to carry more weight for forward-looking financial markets are the guidance provided in the BoE’s statement and the forecasts outlined in the Monetary Policy Report.
Analysts suggest that the BoE is inclined to maintain an open door for future tightening rather than signalling an imminent rate cut. Therefore, the key message from the November policy statement is likely to be the continuation of the “high-for-longer” stance. Such a message could lend support to the British pound.
A noticeable absence of base rate hikes, coupled with statements indicating that rate cuts are not imminent, may provide a modest upside for the pound. This stands in contrast to the euro’s earlier gains against the pound, where the pound’s depreciation has now moderated. While the euro still retains a higher value against the pound compared to the previous week, the pound’s recent slide seems to have stabilised.
The effectiveness of the “higher-for-longer” message will depend on two critical factors:
Composition of the MPC Vote: It is anticipated that the majority of MPC members will vote to maintain unchanged rates. However, an initial downside risk for the pound could emerge if Swati Dhingra, who is among the most dovish members of the MPC, breaks ranks and votes for a rate cut. Barclays economists foresee this possibility, and such a move could signal to markets that rate cuts are under discussion. In this case, the pound might weaken.
Economic Forecasts: The BoE’s economic forecasts are instrumental in shaping the market’s interest rate expectations, which, in turn, influence borrowing costs and exchange rates. An important aspect to watch is the inflation forecast for 2025, which is currently below the target. If the forecasts indicate that inflation is poised to fall below the 2.0% target by 2025, markets could infer that the BoE might consider rate cuts in 2024. Any adjustments to these forecasts can affect expectations.
- Upgrades to Growth and Inflation Forecasts: These upgrades would validate the BoE’s commitment to maintaining higher rates over an extended period. A potential upward revision could support the pound. However, it may also push UK bond yields lower, potentially leading to a softer Pound.
- Downgrades in Growth and Inflation Projections: Such downgrades may undermine the BoE’s guidance, possibly leading to earlier rate cut expectations and a softer pound.
In summary, the pound’s resilience in response to the BoE’s November decision will be influenced by the MPC’s vote composition and shifts in economic forecasts. These factors will shape market expectations, subsequently impacting the pound’s trajectory. While economic conditions are far from ideal, the pound’s performance continues to fare better than initially anticipated.
This resilience is notable given the challenges faced by the UK economy throughout 2021 and 2022, including substantial inflation and a cost of living crisis, which, surprisingly, has not culminated in a recession. This contrasts with many forecasts for the eurozone, which are increasingly leaning toward a potential recession as a baseline scenario.
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