BoE Raise Rates by 25bps, Expecting Inflation to Cool, GBP Edged Higher

BOE RATE DECISION KEY POINTS:

• 25bps Hike Delivered by the BoE.

• Policymakers Warned that if There Were Evidence of More Persistent Price Pressures, Further Tightening Would be Required.

• 2 MPC Members Voted to Keep Rates Unchanged.

The Bank of England have hiked rates by 25 bps as expected with BoE policymakers Tenreyro and Dhingra voting to keep rates on hold. The BoE stated that Q2 CPI is likely to be lower than forecast in February due to longer energy price caps and lower wholesale prices while expressing their belief that the recent increase in inflation data may not be long-lasting. The strong core goods prices in February were attributed to erratic garment prices.

The Central Bank sees wage growth falling back faster than forecast in February as inflation expectations have dropped with businesses seeing year ahead inflation of 5.6% for the three months ending February 2023 in comparison to 6.2% in the three months ending November 2022. The BoE stated that further monetary policy tightening would be necessary if there were signs of more persistent price pressures.

On the recent banking sector turmoil, the BoE maintains that the UK Banking system maintains robust capital and liquidity, the reason for its resilience during the recent fallout. The MPC will continue to monitor closely any effects on the credit conditions faced by households and businesses, and hence the impact on the macroeconomic and inflation outlook. According to the MPC the recent support measures announced in the spring budget could increase the level of GDP by around 0.3% over coming years. The exact impact however particularly around the areas of supply and demand will be assessed before the May Monetary Policy Report.

LOOKING AHEAD

The UK inflation data released this week really put pressure on the Bank of England (BoE) as inflation in the hospitality sector remains particularly sticky. The only positive for the UK and the Bank of England regarding inflation is the Bank’s own Decision Maker Panel survey of businesses which points to less aggressive price and wage rises in the pipeline, and the official wage data finally appears to be easing gradually.

This was confirmed by the Decision Maker Panel data released today which sees inflation topping out at 5.6% in 2023, down from previous estimates of 6.2%. However, this and the lower gas prices will not be able to bring inflation down if the hospitality sector continues to see noticeable increases in prices.

MARKET REACTION

GBPUSD Daily Chart

GBP/USD initial reaction saw a 40 pip rise before a pullback to trade around the 1.23 handle. The bigger picture for GBPUSD remains in cables favor with a test of the yearly high and the psychological 1.2500 level beginning to look increasing likely. On the daily timeframe GBPUSD remains bullish above the 1.2050 handle, with a daily candle close below invalidating the bullish structure.

Key Levels to Keep an Eye on:

Resistance Levels

-1.2400

-1.2500 (Psychological Level)

-1.2620

Support Levels

-1.2200

-1.2145 (50-day MA)

-1.2075 (100-day MA)

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

Written by Zain Vawda for DailyFX