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Bank of England faces key policy decision with sterling at multi-decade low


Bank of England Governor Andrew Bailey has reiterated his pledge to contain inflation, but the Bank faces a difficult balancing act as growth slows and the labor market tightens.

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LONDON – Events Bank of England is facing an important choice as it navigates a plunging currency and the impact of the government’s new energy cost package has altered the inflation outlook.

The Monetary Policy Committee will publish its latest decision on Thursday, with analysts divided on whether to expect a rate hike to 50 or 75 basis points.

According to initial estimates by the Office for National Statistics, inflation in the UK dropped to an annualized 9.9% in August, down from 10.1% in July, due to a drop in motor fuel.

But economists remain skeptical whether this will signal that inflation has peaked and await details next week. a new government financial packagewill include a household energy bill limit.

At the previous meeting, Bank of England forecasts inflation to hit 13.3% by the end of the year, with Citi and Goldman Sachs forecasting a sky-high consumer price index early next year.

There have been many changes since then. The Bank’s inflation forecast is likely to be revised down after the new government of Prime Minister Liz Truss announced the measures.

Economists warn, however, that additional government support could lead to higher medium-term inflation, while the MPC is also navigating sluggish growth and an extremely tight labor market.

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Other central banks around the world have acted aggressively to reduce inflation. On Tuesday, Sweden’s Riksbank raised interest rates by 100 basis points, warning that inflation is “undermining the purchasing power of households.”

The US Federal Reserve expected on Wednesday to lift Standard borrowing rate 75 basis pointsthird consecutive increase of that magnitude.

Markets expect the Fed to maintain its hawkish trajectory until inflation is brought under control, which should provide additional impetus for U.S. dollar as investors seek a safe haven in a rising rate environment.

Meanwhile European Central Bank earlier this month announced a 75 basis point increase to the benchmark deposit rate.

The GBP hit a 37-year low against the dollar last week amid concerns about the health of the economy, as the country’s cost of living crisis began to weigh on activity.

‘Let’s shield our eyes’ for the pound

The bank rallied 50 basis points last month, its biggest gain since 1995, but some analysts believe it will need to grow first and catch up with its global peers to stave off investment. monetary base.

John Hardy, head of forex strategy at Saxo Bank, told CNBC on Tuesday: “If the Bank of England doesn’t raise 75 basis points, let’s keep our eyes peeled for what’s to come. GBP.

“The Bank of England has to hit 75, it has to match its global peers here as we’ve seen the cable [pound-dollar] trading at its lowest level since 1985. It will be a tough performance from the Bank of England if they don’t win 75 basis points at this week’s meeting. “

His thoughts were echoed in a note on Friday by Deutsche Bank George Saravelos, co-head of global FX Research, said investors should avoid currencies with “very negative real yields” in a world that “destroys nominal and real asset value. “

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“It’s no surprise that GBP and JPY have made new multi-decade lows this week. In other words, it’s certain that the Bank of Japan and Bank of England meetings next week are key. very important for the currency: there needs to be a hawkish diversion to help protect both,” said Saravelos.

Deutsche Bank previously warned that the pound especially is facing a potential balance of payments crisisand Saravelos reiterated that the pound “is vulnerable to serious misalignment if the Bank of England does not step up its response.”

Energy prices freeze a ‘game changer’

MPC supporters will certainly be concerned about the recent weakness in the pound, but some analysts say that in the face of the government’s energy package and increasingly dismal economic data, the Bank has more the ability to choose gradually tightening notifications.

Barclays has been dubbed the “game changer” by the price freeze, and it is now estimated that inflation may have peaked and that the direct impact of the energy price cap will reduce consumer price gains from an average of 9.5% in 2023 to just 5%. Barclays analysts say the pressure on households will now be “significant but insurmountable.”

The UK lender does not expect the MPC to acknowledge the full impact of the new measures this week, but sees Thursday as a “transitional meeting” before the Bank updates its forecast and resets the narrative. mine.

“Consistent with weaker data, we expect dissenting dovish voices to grow louder following the announcement of an energy price freeze. This will require gradual tightening if any.” , Barclays UK Chief Economist Fabrice Montagne said in a note on Friday.

Barclays is expected to rise 50 basis points on Thursday with another 25 basis points in November and a change of tone, as the full details of the new government policy measures come out. and updated macroeconomic projections accordingly.

‘Close meeting to call’

Thursday’s meeting is likely to give an indication of how worried the MPC is about the drop in sterling and the domestic market, and how supportive they expect government measures will be. for monetary policy.

ING Developed Markets economist James Smith said it would be a “close meeting to call”, but noted that the Bank of England had not followed the Fed’s lead, having raised 25 basis points. published in July after the Fed rallied 75 points.

While the labor shortage could trigger more persistent inflation concerns in the form of higher wage increases, and tighter central banks at a later date, Smith says this is not necessarily the case. denoted by “outright higher policy rate.”

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“The swap market is pricing the final interest rate in the region at 4.5% next year. A 75bp increase risks adding fuel to the fire, something we suspect the committee will be wary of doing, even if there is an advantage in preloading he added.

ING narrowly favored a 50 basis point increase on Thursday, bringing the Bank Rate to 2.25%, but Smith noted that at least a few MPC members are likely to vote for 75 basis points.

“There’s even a chance we get a rare three-way vote – the first since 2008 – if moderate committee member Silvana Tenreyro votes for a 25bp increase like she did in August. “, he said.

“If our call is correct, then we expect another 50bp in November and at least another 25bp in December.”



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