How the Bank of England Can Support Pound Sterling Into Year-end1 Nov 2023 09:04
The British Pound can walk away unscathed from the Bank of England's November interest rate decision if no members of the Monetary Policy Committee (MPC) vote for a rate cut and inflation and growth forecasts do not change drastically.
This is because keeping interest rates unchanged is entirely expected and will be of little consequence to financial markets. Instead, for forward-looking financial markets, it is the guidance in the Statement and forecasts in the Monetary Policy Report that will matter.
"It's unlikely the BoE will want to close the door to further tightening, so the MPC will likely want to ensure that its previous 'high-for-longer' message is the key takeaway from November’s policy statement. Such a message should provide sterling some support," says George Vessey, Lead FX Strategist at Convera.
"We see no further hikes in the base rate, accompanied by rhetoric that suggests rate cuts are a long way off. This message could provide some upside for GBP, given the already rather low expectations for additional tightening," says Matthew Ryan, Head of Market Strategy at Ebury.
A message of 'higher-for-longer' will be telegraphed in the statement and minutes, but the words will sound hollow unless given credibility by 1) the composition of the MPC vote and 2) the economic forecasts.
Regarding the vote, the market expects a solid majority to vote for rates to be kept unchanged, but an initial downside risk for GBP would involve Swati Dhingra - the most dovish on the MPC - breaking ranks and voting for a rate cut.
This is something economists at Barclays are expecting, and it would amount to an initial signal to markets that the MPC is now discussing rate cuts. If Dhingra votes for a cut, the minutes would need to reference her decision and any associated discussions.
This could provide a signal to financial markets that rate cuts are closer than previously thought.
The typical FX response function suggests the Pound could weaken on such an outcome, but it is unlikely that this alone will be enough to prompt a significant selloff.
The economic forecasts will be of importance as these are utilised by the MPC to guide the market's interest rate expectations, which in turn has real-world impacts on both the cost of borrowing and the exchange rate.
https://www.poundsterlinglive.com/gbp-live-today/19440-pound-to-euro-and-dollar-bank-of-england-help-year-end
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