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Pound-Euro Firms As Bank of England Fires Salvo Against Rate Cut Bets

Published Nov 21, 2023 11:46 Updated Nov 21, 2023 12:12
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Pound-Euro Firms As Bank of England Fires Salvo Against Rate Cut Bets
 
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PoundSterlingLIVE - The British Pound advanced against the Euro, Dollar and other currencies after Bank of England Governor Andrew Bailey and two other policymakers told the Treasury Select Committee there was a case for Bank Rate to be paused at 5.25% for an "extended Period".

In a scheduled testimony to UK lawmakers following November's Monetary Policy Report, Bailey said it was sensible now to keep rates where they are.

Monetary Policy Committee (MPC) member Catherine Mann was also present, warning that the prospects of more persistent inflation imply a need for tighter monetary policy.

The MPC's Dave Ramsden said he would not rule out having to raise Bank Rate further in the future.

This was a broadside salvo by the Bank against rising bets that the Bank had completed the rate hiking cycle and that the next move would be a rate cut.

It resulted in higher UK yields and a widening in the spread between UK two-year bond yields and those of Germany by 2.0%. The yield differential remains a key driver of the Pound to Euro exchange rate (GBPEUR).

GBPEUR is up to 1.153 at the time of writing, making for a gain of 0.25% on the day. The Pound to Dollar rate is higher by a similar margin at 1.2535, and Sterling is higher against most G10 peers.

Money market pricing has turned increasingly 'dovish' over recent weeks, with markets showing investors had moved to expect a first cut coming as early as May following last week's inflation numbers.

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A total of approximately 80 basis points of cuts were 'priced in' for 2024 after it was revealed inflation fell further than expected in October.

This has the effect of lowering UK bond yields, which influence the cost of funding. Therefore, the UK has seen borrowing costs come down, even before Bank Rate is cut.

The Bank is clearly uneasy about this, judging it works against efforts to contain inflation and has appeared increasingly uneasy with growing rate cut bets.

Governor Bailey said in an overnight speech to the National Farmers Union that it was too early to consider rate cuts, as some components of inflation remained far too high and as wage growth continues to rise sharply.

"The Bank of England Governor has some words of warning," says analyst You-Na Park-Heger, an analyst at Commerzbank (ETR:CBKG). "He even went as far as saying that it might become necessary to hike interest rates further if there were signs of stubborn inflation."

An original version of this article can be viewed at Pound Sterling Live

Pound-Euro Firms As Bank of England Fires Salvo Against Rate Cut Bets
 

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