BoE preview: Another rate hike expected, emphasis on flexibility

When:

The BoE interest rate decision will be announced on Thursday 17^th March at noon local time.

What to expect

The BoE is broadly expected to hike interest rates for a third straight meeting. Policymakers are expected to support a 25-basis points interest rate rise to 0.75%, the level that interest rates were at before the pandemic. However, the BoE may adopt a more flexible tone going forward.

Inflation

The meeting comes as inflation in the UK rose to 5.5% YoY in January, its highest level in 30 years. Inflation is no longer expected to peak at 7% in April but instead, keep climbing. Oil prices have jumped 25% so far this year, which will keep inflation hot, potentially hitting 9.5% in October.

The big fear for policymakers is that rising inflation will become entrenched, prices hikes and higher wages will become normal. Wages in January jumped 4.8% YoY, highlighting the concerns. With the risk of persistently high inflation, the BoE will want to act now,

Growth

However, as BoE policymaker Silvana Tenreyo pointed out last week, rising energy prices could also dampen the growth outlook, raising fears of stagflation.

So the BoE will be looking to tighten monetary policy in the face of slowing growth, similar to what the ECB did last week, a move that sent the EUR lower.

Similarly, the GBP has struggled to gain traction despite the prospect of higher interest rates. This could be due to fears over an aggressive BoE sending the UK economy into recession. Should the BoE look to return interest rates to 2% too quickly, the UK economy could be destabilized and unemployment push higher (after falling to 3.8%, below its pre-pandemic level).

Outlook

Where the BoE goes from here will depend on whether policymakers are more worried about inflation or growth.

The market expects the BoE to be more concerned about growth, with interest rates expected to reach 1.5% by the summer and 2% by the end of the year.

The BoE will likely want to keep its option open given the uncertainty in the outlook and the risks to growth, matching a strategy adopted by the ECB last week.

Where next for EUR/GBP?

EUR/GBP is extending its rebound from the 0.82 low reached last week. The pair re-taking the 50 & 100 sma, combined with the bullish RSI, supports more upside to come.

The price pushed above the falling channel’s upper band, hitting a five-week high of 0.8455 before sellers re-entered the marker, pulling the price mildly lower.

Buyers will need to break above 0.8455 to bring 0.8480, the 2022 high, into play. Above there, bulls could continue to gain momentum towards 0.85 round number.

Immediate support can be found at 0.84, the round number and February 28 high, with a break below here exposing the 50 sma at 0.8560. A move below this level could negate the near-term bullish trend.

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