Bank of England fails to keep up with Fed
Bank of England fails to keep up with Fed
The Bank of England (BoE) has raised its main policy interest rate, or the Bank Rate, from 1% to 1.25%, in line with consensus expectations. The move, however, disappointed investors who were hoping for a larger rise following the 0.75% increase in the US federal funds rate yesterday.
Three of the nine-member committee once again voted for a larger 50 basis point (bps) rise, but the majority felt the smaller increase was more appropriate. As a result, the pound has fallen by around a third of a percentage point against the US dollar, and half a percentage point against the euro.
In its statement, the BoE mentioned that recent growth data had been weaker than the committee had expected, as consumer confidence has fallen further along with businesses sentiment. The bank said that the labour market remains tight, even if unemployment rose slightly in the three months to April.
Meanwhile, the Bank has continued to warn of higher inflation, raising its estimate for the peak from 10% to 11% for October. Inflation is then expected to fall back, although higher oil prices of late could mean it proves stickier.
Looking ahead, we expect the Bank to deliver a 25 bps hike in each meeting until February 2023, peaking at 2.25%. However, the risk is skewed towards even more rises, as signs of “second round” inflation pressures are becoming more evident, even if the BoE is not concerned by them yet.
Second round pressures can occur as higher wages drive inflation higher still, at risk of round after round of wage and price rises, as expectations of inflation become a self-fulfilling prophesy.
Money markets have a more aggressive hiking path, with investors expecting the Base Rate to reach just over 3% over the same time horizon. If the BoE continues to hike more slowly than market expectations, then we are likely to see the pound weaken further against other major currencies.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.