FX Viewpoint | The BOE bounce for the GBP | Article – HSBC VisionGo
- The BOE MPC voted to keep rates on hold, with two members voting for an early end to QE…
- …but rates could rise even before the end of the QE programme, according to its statement
- All this should suggest some room for near-term GBP outperformance, albeit with long-term caution, in our view
The BOE kept its policy rate on hold, as widely expected, but there was an additional vote for an early end to QE
At its September meeting, the Bank of England’s (BOE) Monetary Policy Committee (MPC) voted unanimously to keep the Bank Rate on hold at 0.10%, and by 7-2 (instead of the widely expected 8-1) to keep the quantitative easing (QE) target unchanged. BOE Deputy Governor Dave Ramsden and MPC member Michael Saunders voted for a reduction in the target for bond purchases from GBP875bn to GBP840bn. In some respects, this is largely symbolic, given it would only limit the BOE’s bond buying by a few months. But clearly it sends the signal that these two policy makers want to tighten policy settings right now.
The BOE statement suggests that rates could rise before the end of the QE programme, opening the door to a rise in 2021
The most eye-catching statement was that, for the MPC members who did not vote to stop QE, “any future initial tightening of monetary policy should be implemented by an increase in the Bank Rate, even if that tightening became appropriate before the end of the existing UK government bond asset purchase programme”. This appears to open the door to a rate hike by the end of this year, even while the BOE is injecting net stimulus into the economy via QE. Noting the risks that the first rate hike could come sooner, our economists think that the BOE will raise the Bank Rate by 15bp to 0.25% in February 2022, and then by 25bp to 0.50% in May 2022, as the central bank will have more clarity on the impact of the withdrawal of pandemic-related fiscal support on the domestic economy.
The BOE decision was somewhat more hawkish than expected, which suggests that there is some room for GBP outperformance over the near term, in our view
In our view, the details of the BOE policy decision, i.e., the vote on QE and the commentary around when rate hikes might start, were somewhat more hawkish than expected and suggest some room for near-term GBP outperformance. Interest rate expectations have already moved forward in recent months, with hikes now implied for Q1 next year. This should support the GBP for now, and any signs that these expectations might be pulled further forward would be even more bullish.
Yet, we still expect the GBP to grind weaker against the USD over time
But we would still temper long-term optimism on the GBP. While the BOE may hike sooner than some others in G10, the overall scale of tightening looks likely to be less than for many other developed country central banks. The BOE commentary suggests neutral rates may be nearer to 1%. Contrast this with the Federal Reserve, for example, the 2024 median interest rate projection is 1.75%. This should act as an impediment to lasting GBP strength, in our view.
The UK also faces significant and ongoing supply-side pressures regarding gas supply, labour supply, and various logistics issues as both a hangover from COVID-19 and as a direct consequence of Brexit. These increased costs and burdens on UK competitiveness point to long-term fair value for the GBP drifting lower over time, in our view.
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