Bank of England raises interest rates by 50 bps
Daily Currency Update
The Bank of England sprung a hawkish surprise on Thursday, delivering a shock 50bp interest rate hike and lifting borrowing costs to their highest level since 2008.Markets were predicting a ‘standard’ 25bp hike, as were most economists. In its statement, the BoE indicated that ‘significant upside news’ in inflation data had warranted a larger rate increase, and that second-round effects on domestic prices were likely to take longer to reverse than they had taken to materialize. Wednesday’s UK inflation report showed that core price pressures had broken to a fresh three-decade high above 7%.
There may be more misery ahead for mortgage holders, as the bank maintained the line that further hikes would be required should price pressures persist. We see this as a potential signal that at least another 25bp hike could be on the way in August and expect the base rate to top out at 6%, or perhaps even higher, by the end of the year.
Following the BoE decision, fears of a UK recession have ramped up a notch or two.
Key Movers
Federal Reserve chair Powell’s semi-annual testimony to Congress had gone under the radar in the past couple of days. Powell largely reiterated much of his comments from last week’s FOMC meeting, notably that US rate cuts are not on the horizon any time soon.Heightened volatility is expected to continue as we see another escalation in the Russia vs Ukraine war. Sergei Shoigu, the Russian defence minister, has visited troops on the frontline in his first public appearance since the Wagner Group attempted to overthrow him.
Confidence in the global economy will continue to be a key element in the short term with fears that global central bank actions to defeat inflation pressure in the services sector will trigger a sharp downturn in the major economies.
The situation in Russia will need to be watched closely, especially given the potential impact on commodity prices and global inflation pressures.
Expected Ranges
- GBP/USD: 1.2650 - 1.2790 ▲
- GBP/EUR: 1.1620 - 1.1710 ▲
- GBP/AUD: 1.0784 - 1.0950 ▲
- EUR/USD: 1.0780 - 1.0950 ▲