BOE Preview: Record 3rd Consecutive Hike

Expectations of the BOE making history with a third consecutive rate hike could be offset by a softening outlook on the British economy.

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Sanctions flows

The pound has been exhibiting weakness since the start of the war in Ukraine, despite a broad expectation of the BOE hiking. Part of that could be that the UK is particularly exposed to Russian assets subject to sanctions. With the assets of Russian oligarchs getting frozen by the UK government, there will presumably be many more Russian-owned assets being liquidated, with the proceeds sent overseas before the sanctions are extended. If these flows ease, GBP could become more attuned to monetary policy.

Counting the MPC votes

In the last two meetings, the MPC members have been divided on whether to raise rates by 25bps or 50bps, with the more hawkish option just losing out.

The consensus among analysts is that the next rate hike tomorrow will again be 25 beeps, with dissenters voting for 50. But the number of dissenters is expected to diminish owing to rising economic risks. What could catch the markets a bit by surprise is if there is unanimity on a 25bps hike, or if there are some votes against it (very unlikely). That could give off a dovish tone to markets.

Back to normal already?

The initial idea that the events in Ukraine would give central banks a bit of a pause seems to be fading. Analysts are now projecting that the BOE might take a more hawkish stance precisely because of the increased inflationary pressures from the conflict.

Note that if the BOE raises rates this time to 0.75%, that would put them back to where they were before the pandemic. The thought is that the BOE will take a more flexible tone going out of the meeting, potentially signalling that another rate hike at the next meeting is unlikely.

Stagflation is evident

Wages have been rising but not as fast as inflation. Year-on-year, wages are up 4.8%, whereas inflation stands at 5.5% - a 30-year high. The increased costs along with tighter monetary policy could lead to slow growth. For that reason, the usual response of an interest rate hike pushing up the currency might not manifest. Raising rates in the face of slowing growth could weaken the currency as investors shy away from less growth.

Psychological support vulnerable

GBP/USD has dipped further over the past week, plunging an additional 1.57%. The FX pair extended its losses to a total of 5.30% since January’s peak at $1.3750. After breaking the 200-week average near $1.3130 last week, price action hints at more downside.

If the local psychological support at $1.30 is lost, the door opens to $1.274. Immediate resistance can be found at the 200-week average and last week’s open at $1.3237. However, this is the third consecutive bearish week, and it’s coming down accompanied by high momentum. Any short-term upside could be ineffective.

Source: Spreadex trading platform

Key takeaways

The BOE is expected to hike but if the MPC votes are unanimous on one quarter-percentage-point hike the pound could extend its losses. Analysts expect some hawkishness due to rising inflation, and if it's not received cable could slide further. Combined with slower growth, though, the impact might be only temporary, especially if the narrative turns a little more flexible.