- The Bank of England has raised rates by 25 bps, as widely expected.
- Dissent has remained limited, at two out of nine members.
- Guidance for further rate hikes has been a positive surprise.
Dovish Federal Reserve + hawkish Bank of England=more GBP/USD gains. For those trading cable, that is the bottom line. But, why are the same decisions interpreted differently? The Fed undoubtedly acknowledged the impact of the banking crisis on the path of raising rates. The BOE? Not so much. And there is more.
While the BOE increased borrowing costs by the lowest pace since June – previous moves were of 50 bps – it surprised with several statements. First, it said more hikes are needed, mostly due to higher inflation. Wednesday's inflation report for February surprised with 10.4%.
Secondly, it noted the strength of the labor market. Unemployment is low due to labor shortages and not necessarily a strong economy, but that does not seem to matter to the BOE.
Third, Monetary Policy Member Jon Cunliffe was surprised by voting with the majority once again – he refrained from joining the dovish side. All in all, a strong majority of seven members backed a rate hike, with only two against the move. The hawks are strong.
What is next? I expect the Pound to continue moving higher not only due to the BOE decision but to positive developments for Britain of late. The EU and the UK sealed a deal on Northern Ireland, improving relations. Moreover, UK Chancellor of the Exchequer Jeremy Hunt said that there is a lower chance of a recession.
That is encouraging. Moreover, the BOE acknowledged that the fiscal support introduced in the recent budget will raise Gross Domestic Product. This additional approval by the independent institution provides more support to the Pound.
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