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Bank of England hikes rates as scheduled, inflation will return to 2%

2022-08-08

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The pound fell slightly against the dollar this week. The Bank of England raised its benchmark interest rate from 1.25% to 1.75%, the largest increase in 27 years. Bank of England Governor Bailey acknowledged that the rate hike would have a severe impact on the least wealthy, but he insisted returning inflation to 2% was an absolute priority. UK GDP growth has slowed and forecasts point to a recession later this year.

The U.S. Commodity Futures Trading Commission CFTC foreign exchange non-commercial position report shows that as of 2022-08-02 the week (hand) GBP/USD long positions decreased by 5,301 contracts to 29,305 contracts. A further drop in the pound would negate much of the Bank of England's efforts to rein in inflation, keeping the previously bleak outlook in place. Sterling was down 0.9% at $1.2047 after falling to $1.2004, its lowest level in more than a week.

Bank of England hikes rates as scheduled, inflation will return to 2%

BoE Governor Bailey: Inflationary pressures have intensified significantly recently, and underlying nominal wage growth is expected to accelerate further. Stronger action in August is justified, as there are signs that price pressures are becoming more persistent. Our commitment to falling inflation back to 2% will not waver.

The Bank of England is likely to tread cautiously. The impending recession is expected to force more than a million households to choose between heating and buying enough food, according to the National Institute for Economic and Social Research (NIESR), a think-tank.

British Prime Minister candidate Sunak said that increased borrowing will put upward pressure on interest rates, which will mean higher mortgage payments for people; the Bank of England took action today, and any future government must control inflation, not exacerbate it; As a candidate for prime minister, I will prioritize tackling inflation, boosting economic growth, and then tax cuts.

The labor market is likely to ease only slowly in response to falling demand. Monetary policy is not on a preset path, and faster policy tightening now reduces the risk of longer and more costly tightening cycles later.

The economic costs of the Russia-Ukrainian conflict will not affect the Bank of England’s target of 2%, and a 50bps rate hike today does not mean we are now on the pre-determined path of raising rates by 50bps per meeting, in September and beyond. All tool options will be considered in future meetings. But rising energy prices exacerbated the decline in real incomes, causing the outlook to deteriorate sharply again. The UK economy is expected to enter a recession later this year, with the recent mix of high inflation and weak activity a challenging backdrop for monetary policy.

Truss, the UK foreign secretary, who is the main contender for the new prime minister, has questioned the Bank of England's anti-inflation progress, wants to set a "clear way forward" for monetary policy and revisit the Bank of England's mandate.

Truss has proposed scrapping more than 30 billion pounds ($36 billion) in tax increases previously imposed. The plan was launched during the tenure of former Chancellor of the Exchequer Rishi Sunak, who is also a candidate for the new prime minister. Tax cuts now - when the UK economy has little spare capacity - could mean additional interest rate hikes are needed to cool inflation. Truss hopes BoE policy within its remit will ensure it takes a hawkish stance on inflation.

The daily K-line chart of GBP/USD shows:

After the low-level bullish momentum slowly rose, it began to move in a narrow range. The top suppression focused on the vicinity of 1.03391, the low-level support focused on the vicinity of 1.00229, and the low-level bulls had an opportunity to enter the market. The MACD indicator remained in the short range and moved up in a narrow range, and the RSI indicator was at the 50 equilibrium line. Weakness hovering nearby; as shown in the figure:

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Bank of England hikes rates as scheduled, inflation will return to 2%

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