British Pound: BoE stance leaves Pound exposed – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad reports that the Bank of England (BoE) kept Bank Rate at 3.75% but signaled a low bar for further tightening. Governor Bailey warned policy may have to tighten if Middle East conflict-driven second-round effects emerge. Haddad highlights slower quantitative tightening and argues the United Kingdom (UK) economy’s slack leaves British Pound (GBP) vulnerable to a dovish BoE repricing.

BoE hold and QT slowdown weigh on GBP

"BoE holds and signals a low bar for a hike. As was widely expected, the Bank of England (BoE) voted by a majority of 6-3 to keep the policy rate at 3.75% for a sixth straight meeting. Once again, Megan Greene, Catherine L Mann and Huw Pill backed a 25bps hike."

"BoE noted “there has been little evidence so far of material second-round effects in price and wage-setting.” Indeed, easing UK wage growth and services inflation gave the BOE room to stand pat"

"However, Governor Andrew Bailey warned that “if the conflict in the Middle East persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases, it is likely that policy may have to tighten.”"

"The BoE also announced plans to slow the pace of quantitative tightening (QT) with a predictable multiyear plan. Its gilt holdings will fall by an average of £46bn a year, through 2034, including £20bn of annual sales. That’s down from an £87.5bn average reduction and £32bn of sales over the past four years. The slower QT runoff pace supports gilts, but elevated energy prices remain the bigger driver. Unless energy prices ease in a sustainable way, gilt yields will stay under upward pressure. "

"The swaps curve implies about 100bps of BoE rate hikes in the next twelve months to 4.75%. In our view, the BoE may not need to tighten as much as markets expect. The UK economy is already operating below capacity, Bank Rate at 3.75% is near the top of the BoE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive. Bottom line: GBP is vulnerable to a dovish BoE repricing."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)