Despite being the first of the major central banks to tighten policy, the rate hike by the BOE was felt to be too weak as inflation continued to spread throughout the UK economy. To be fair, monetary policy is not putting the brakes on inflation as much as we, or policymakers for that matter, expected. Remember this statement from Bailey about a year ago?
“Monetary policy can’t solve supply shocks, monetary policy can’t make computer chips, it can’t make wind, it can’t make truck drivers.”
And that is the problem. At this point, the rate hike is acting more on demand factors, helping to ease pressure on the supply side. It’s a bad look for central banks as consumers continue to be weighed down by high prices and economic uncertainty.
Policy makers are trying to balance all these by bringing the economy to a ‘soft landing’. But as the economic situation is deteriorating and social politics in some countries is turning ugly, such a picture is getting darker day by day. Boris Johnson was not spared from all this suffering; Although ‘Partygate’ probably doesn’t deserve the name.
Back at the BOE, they are now at a crossroads in trying to further tame inflation – which is still pushing into double digits – and not run the economy into the ground.
The cost of living is getting worse and this is a big negative for the BOE to consider in future policy decisions. Today, the BOE will increase the bank rate even more, it is expected by 50 bps to 1.75%, but the window for tightening has definitely become very narrow.
What does that mean for the pound?
Well, this means we are finally getting closer to a less hawkish (more dovish) stance by the BOE and if anything it could be a more pronounced pivot than we saw last week with the FED and RBA. . That leaves sterling desperate to find any counterpoint to its monetary policy.
The risks are clearly turning to the downside and this will not bode well for the pound’s outlook, especially if further recessionary signs continue to emerge in the coming weeks/months.
Cable is currently holding around 1.2170, having experienced some minor volatility since falling to 1.1800 last month. However, I attribute that to the decline in the dollar more than the sentiment in sterling. A drop below 1.2200 this week is a bit of a rebound and we could be looking at 1.2000 again after the BOE, which blocks any major dollar selling from the US jobs report tomorrow.