BoE Interest Rate Decision Preview: High UK Inflation Favors 25bp Rise

• This Thursday the decision of the British central bank on the interest rate will be known.
• The Bank of England is expected to raise rates again by 25 basis points to 4.75%.
• The British Pound is likely to see a lot of volatility following the Bank of England announcements.

The Bank of England (BoE) is on track to carry out its 13th successive interest rate hike this Thursday, as it continues its firefighting mission to control high levels of inflation.

Although inflation has softened from double-digit numbers seen months ago, the UK CPI remains one of the highest among major advanced economies. Therefore, the main focus will be on the Bank of England’s monetary policy statement for further clues on its rate hike outlook, in the absence of Governor Andrew Bailey’s press conference and updated economic projections. .

Bank of England Interest Rate Decision: What to Know in the Markets Thursday June 22

• GBP/USD consolidates its recovery below 1.2800 as the US dollar licks its wounds near its monthly lows after the sell-off sparked by ECB President Jerome Powell’s testimony.
• Speaking before the House Financial Services Committee on Wednesday, Fed Chairman Jerome Powell said that “inflationary pressures remain elevated, and the process of bringing inflation back to 2% has a long way to go”, adding that “almost all” participants expected further rate hikes.
• UK inflation data came in better than expected, with core CPI reaching the highest rate since March 1992. Investors seem torn between 25 basis points and 50 basis points, with markets now pricing 52% of the probability of a 25 basis point rate hike in June by the Bank of England, compared with the 78% seen before the release of UK CPI data.
• Markets are cautious on Thursday amid expectations of further tightening from central banks. S&P 500 futures are slightly lower, while 10-year US Treasury yields trade near weekly lows near 3.70%.
• The BoE’s monetary policy announcements will be key to the near-term direction of GBP/USD, while US jobless claims and the second day of Powell’s testimony will also take center stage.

Analysts at Société Générale weigh in, “Could the BoE raise rates by 50 basis points instead of 25? That is the question after the latest shock to UK inflation this morning. Core CPI accelerated to 7.1% May yoy, a new decade high We know since last week that wage growth accelerated to 7.2% yoy Both numbers are far from the 2% inflation target (second round effects?), so the BoE may be forced to respond.”

“The dilemma facing the BoE is whether to prolong the tightening cycle for a few months or pick up the pace again to reach a higher ceiling sooner. Both scenarios risk wreaking havoc on the real estate market,” Société Générale added.

When will the BoE publish its monetary policy decision and how could it affect GBP/USD?

Today, Thursday June 22, the BoE is expected to raise key rates by 25 basis points (bp) from 4.50% to a 15-year high of 4.75%. The interest rate decision will be announced at 11:00 GMT, accompanied by the minutes of the meeting.

Speaking before a parliamentary committee last week, BoE Governor Andrew Bailey said inflation was taking “much longer than expected” to come down and the labor market was “very tight.” Bailey was speaking after the latest data released by the Office for National Statistics (ONS) will show the UK unemployment rate dipping to 3.8% in the February-April quarter from 3.9% in the three months since. They ranged from January to March, beating the market consensus of 4.0%.

For its part, the number of applicants for unemployment benefits decreased by 13,600 people in May, compared to the expected decrease of 9,600 people. In the UK, average weekly earnings excluding premiums were 7.2% yoy in April, up from 6.8% previously and 6.9% expected. It should be noted that the data for April include the impact of a 9.7% increase in the minimum wage.

The figures caused markets to increase their bets on the Bank of England rate hike, pushing the yield on two-year government bonds to its highest level since 2008. Markets raised their expectations for the rate ceiling. BoE up to 6.0% in early 2024.

However, two separate surveys released a day before UK Consumer Price Index (CPI) data showed that UK food price inflation is declining, suggesting it may have already reached its peak. Market research firm Kantar said the rise in grocery prices eased to 16.5% in the four weeks to June 11, down from 17.2% a month earlier and the lowest reading this year. Lloyds Bank Plc said production costs for UK food and drink producers fell for the first time in the past month since 2016,” Bloomberg reported Tuesday.

The all-important UK inflation data on Wednesday reinforced the narrative that the BoE will have to stick with interest rate hikes to combat persistent inflation. According to the latest data released by the UK Office for National Statistics (ONS), the UK annual CPI accelerated by 8.7% in May, the same pace as April. The market consensus foresaw an increase of 8.4%. Core CPI (which excludes food and energy volatility) rose 7.1% yoy last month, up from 6.8% in April, beating estimates for the same 6.8%.

That said, the chances of a 50 basis point rate hike seem slim as the bank would refrain from plunging the UK economy into a recession with big rate hikes. Instead, markets expect the BoE to go for several 25 basis point hikes throughout this year. Therefore, the direction of the policy and the composition of the vote will be key in determining the next direction of prices in the GBP/USD. At the May monetary policy meeting, two policy makers, Silvana Tenreyro and Swati Dhingra, voted to keep rates at 4.25%.

The British pound is likely to come under intense selling pressure if the UK central bank maintains its dovish tone in the monetary policy statement, fueling uncertainty about the rate hike path. In such a case, GBP/USD is likely to correct towards 1.2600. On the other hand, the cross could extend the uptrend and challenge the powerful resistance 1.2870 in a hawkish outlook.

Offering a brief technical outlook for the major currency, Dhwani Mehta, Asian Session Chief Analyst at FXStreet, explains: “GBP/USD has charted a bullish flag formation on the daily candlesticks, awaiting the confirmation of Bank of England interest rate decision The 14-day Relative Strength Index (RSI) has turned flat, but remains well above the 50 level, suggesting there is more room to the upside for investors. buyers of the Pound”.

Dhwani also outlines important technical levels to trade GBP/USD: “To the upside, a sustained move above the 1.2780 barrier would likely validate the bullish flag, prompting a further rally towards 14-month highs of 1.2849. Above , British Pound buyers will challenge the round figure of 1.2900. Alternatively, strong support awaits at 1.2672, below which a sharp sell-off towards the 1.2600 threshold cannot be ruled out.”

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About the BoE interest rate

The BoE interest rate is announced by the Bank of England. If the BoE is aggressive on the inflationary outlook for the economy and raises interest rates, it will be positive, or bullish, for the British pound. Similarly, if the Bank of England takes a dovish view on the UK economy and maintains the current interest rate, or cuts the interest rate, GBP/USD could moderate.