BoE Governor Bailey: UK inflation dynamics are different to US
Governor Andrew Bailey faces questions from the media after the BoE maintained its policy rate unchanged in a 7-2 vote on Super Thursday.
Key Quotes from Bailey’s presser
Encouraging that inflation will be close to target in coming months.
Absence of data surprises is a sign we are getting back to more normal economic times.
Higher than expected wage and services inflation since Feb should give us pause for thought, but should not overinterpret.
Change in bank rate in June is neither ruled out nor a fait accompli
Expect second round effects on domestic wages and prices to fade slightly faster than previously assumed.
We are making very good progress in returning inflation to 2%.
Likely we will need to cut bank rate over the coming quarters.
Possible we will need to cut rates more than currently priced into market rates.
Rate cuts will really depend on how data evolve.
We have no preconceptions about how far and fast we will cut rates.
Each meeting is a new decision for rates.
Market moves in interest rate expectations have been dominated by US moves.
UK inflation dynamics are different to US.
There has been some decoupling recently between UK and US market rate expectations.
I look quite closely at pass through of cost into prices.
There is no law that says the Fed must move before other central banks.
Once small cut in the bank rate would still leave us with restrictive monetary policy.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
This section below was published at 06:00 GMT to cover the BoE’s policy announcements and the initial market reaction.
The Bank of England (BoE) adhered to market expectations by maintaining its policy rate at 5.25% during its Super Thursday event, aligning with the consensus forecast.
In the Monetary Policy Committee (MPC) vote, there was a 7-2 decision in favour of keeping rates unchanged, with MPC members Dave Ramsden and Swati Dhingra advocating for a 25 bps rate cut.
The Bank of England advanced further in its consideration of lowering interest rates, with a second official endorsing a rate cut, while Governor Andrew Bailey expressed optimism about the direction of progress. In its post-meeting statement, the BoE included a new remark, indicating its intent to closely monitor upcoming economic data.
Further Takeways from the statement
BoE’s Bailey: We have had encouraging news on inflation, need more evidence it will stay low before cutting rates.
BoE’s Bailey: “Optimistic that things are moving in the right direction” for a rate cut.
MPC will consider upcoming data and if these show a receding risk of inflation persistence.
“Range of views” among MPC members voting to hold rates about how much more evidence needed to cut rates.
BoE sees CPI returning to 2% target in Q2 2024 (Feb: Q2 2024), based on market interest rates and modal forecast.
BoE forecast shows CPI in one year’s time at 2.6% (Feb forecast: 2.8%), based on market interest rates and modal forecast.
BoE forecast shows CPI in two years’ time at 1.9% (Feb forecast: 2.3%), based on market interest rates.
BoE forecast shows CPI in three years’ time at 1.6% (Feb forecast: 1.9%), based on market interest rates.
BoE estimates GDP +0.4% QQ for Q1 2024 (March forecast: +0.1%), sees +0.2% QQ in Q2 2024 (March forecast: “a small further rise”).
BoE forecasts GDP in 2024 +0.5% (Feb: 0.25%), 2025 1% (Feb: +0.75%), 2026 1.25% (Feb: 1%), based on market rates.
BoE repeats that MPC will ensure bank rate is “restrictive for sufficiently long to return inflation to the 2% target sustainably”.
BoE repeats that MPC has judged since autumn 2023 that monetary policy “needs to be restrictive for an extended period”.
BoE repeats that policy stance could remain restrictive even if bank rate were cut.
BoE repeats that MPC “will keep under review for how long bank rate should be maintained at its current level”.
BoE increased divergence of demand between us and Europe could lead to monetary policy divergence, with implications for FX.
Market reaction to BoE event
GBP/USD retreats to a new two-week low in the 1.2450-1.2445 band in the wake of the BoE’s interest rate decision and ahead of the press conference by Governor Andrew Bailey.
British Pound PRICE Today
The table below shows the percentage change of British Pound (GBP) against listed major currencies today. British Pound was the strongest against the US Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.16% | -0.37% | -0.27% | -0.05% | -0.06% | -0.12% | -0.21% | |
| EUR | 0.16% | -0.21% | -0.13% | 0.12% | 0.10% | 0.05% | -0.04% | |
| GBP | 0.37% | 0.21% | 0.10% | 0.31% | 0.32% | 0.25% | 0.17% | |
| JPY | 0.27% | 0.13% | -0.10% | 0.24% | 0.21% | 0.19% | 0.11% | |
| CAD | 0.05% | -0.12% | -0.31% | -0.24% | -0.01% | -0.07% | -0.15% | |
| AUD | 0.06% | -0.10% | -0.32% | -0.21% | 0.00% | -0.06% | -0.14% | |
| NZD | 0.12% | -0.05% | -0.25% | -0.19% | 0.07% | 0.06% | -0.08% | |
| CHF | 0.21% | 0.04% | -0.17% | -0.11% | 0.15% | 0.14% | 0.08% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).
This section below was published as a preview of the Bank of England rate decision at 06:00 GMT.
- UK central bank is seen keeping its policy rate intact at 5.25%.
- Bank of England is seen reducing its rates by 75 bps this year.
- GBP/USD should maintain its recent familiar range in the wake of the event.
The Bank of England (BoE) is set to hold its policy rate flat for a sixth meeting in a row on Thursday amid persistent disinflationary pressure in the UK and investors’ repricing of interest rate reductions earlier than anticipated.
Bank of England could lean towards dovish hold
It’s anticipated that the Bank of England will maintain the benchmark interest rate at 5.25% after its policy meeting on Thursday at 11:00 GMT. Alongside the policy rate announcement, the bank will release the Monetary Policy Minutes and the Monetary Policy Report, followed by a press conference held by Governor Andrew Bailey.
Although initially anticipated to trail behind the Federal Reserve (Fed) and the European Central Bank (ECB) in initiating their easing measures, the Bank of England (BoE) now appears poised to begin reducing interest rates sooner than expected due to mounting disinflationary pressures.
Furthermore, investors widely anticipate a cut in the Bank of England’s interest rates, potentially occurring in August or September, with around a 70% chance of a subsequent decrease in December.
In March, disinflationary trends in the UK accelerated, with the headline Consumer Price Index (CPI) increasing by 3.2% (down from 3.4%) and the core CPI, which excludes food and energy costs, rising by 4.2% (down from 4.5%).
Indeed, the most recent inflation data from the UK seems to challenge the Bank of England’s narrative of “higher for longer.” Regarding the upcoming event, it is widely expected that the central bank will keep rates unchanged, with the possibility of extending its cautious approach.
During a recent event held by the Institute of International Finance, Governor Andrew Bailey stated that the upcoming inflation figures are anticipated to demonstrate a significant decrease, while he also hinted at some loosening of the labour market.
Back to inflation, the latest BoE’s Decision Maker Panel survey (DMP) conducted between March 8 and 22 showed that one-year ahead CPI inflation expectations decreased to 3.2%, dropping from 3.3% in February. Similarly, three-year-ahead CPI inflation expectations declined to 2.7% over the three months leading to March. Expected year-ahead wage growth, measured on a three-month moving average, also decreased to 4.9%. Consequently, firms anticipate a 1.5 percentage point decrease in their wage growth over the next 12 months based on three-month averages.
At the BoE’s March 21 gathering, Governor Andrew Bailey remarked that it was justifiable for financial markets to anticipate interest rate reductions, expressing optimism regarding the trajectory of inflation. Bailey also indicated that it was reasonable for markets to anticipate two or three rate cuts this year. While refraining from explicitly endorsing the market curve, he acknowledged: “I’m not going to endorse the market curve, but I think that it’s reasonable that markets are taking that view, given the way inflation has performed.”
Ahead of the BoE gathering, analysts at TD Securities argued: “The BoE will likely stand pat at its May meeting, as wage and inflation data is a bit too sticky to warrant a cut just yet. We see a repeat in language and another 8-1 vote, though the risks are marginally skewed to another dovish dissenter joining Dhingra. We also do not look for any major changes to the projections, though the Year 2 inflation forecast could be lower.”
In the same vein, strategists at Danske Bank noted: “We expect the Bank of England (BoE) to keep the bank rate unchanged at 5.25% on May 9, which is in line with consensus and current market pricing. Overall, we expect the MPC to soften its communication, priming the markets for an imminent start to a cutting cycle. We expect the first 25 bps cut in June.”
How will the BoE interest rate decision impact GBP/USD?
Despite inflation continuing to trend lower in March, the central bank is unlikely to change its tone to a more relaxed one and hence give a more solid signal towards the potential timing of the interest rate reduction. While surprises have been practically ruled out, the British Pound is seen maintaining its current familiar range for the time being.
Under such circumstances, GBP/USD needs to convincingly clear the critical 200-day Simple Moving Average (SMA) at 1.2545 to allow for the continuation of the ongoing recovery, which started around yearly lows in the 1.2300 neighbourhood recorded on April 22. FXStreet Senior Analyst Pablo Piovano suggests:, “Further gains may lead Cable to revisit the May peak of 1.2634 (May 3), an area that appears to be reinforced by the provisional 100-day SMA at 1.2640. Further up comes the 2024 top of 1.2893 (March 8). Surpassing this level could propel GBP/USD towards the psychological milestone of 1.3000 in the first instance.”
On the flip side, Pablo highlights that “the resurgence of the selling bias could prompt some corrective moves in the short-term horizon. That said, an immediate contention aligns at the 2024 bottom of 1.2299 (April 22). The breach of this region exposes further weakness, although the next support is not expected to emerge until the October 2023 low of 1.2037 (October 4).