The pound fell following the Bank of England’s decision on Thursday to keep interest rates unchanged. The decision has taken markets by surprise whose expectations for a November rate hike were very high. Markets are now lowering their expectations for future UK interest rate hikes, as it was also suggested that the December rate hike might also be postponed.
The disappointing news has hurt the pound, which experienced the biggest fall since 28th of September. With the market expecting more than one hike and the bank rate going as high as 1.10% by June 2022, the news was really unexpected. Economists believe that a December or February hike is still possible, which could offer support to the pound. On Friday, the pound remained lower, but tried to stabilise.
The Bank explained that they have postponed the rate hike as they wanted to wait and see the impact of the government's job support scheme which ended at the end of September.
Uncertainties such as rising energy costs impacting households, ongoing supply chain disruptions, and Brexit tensions could all affect economic recovery. Inflation is a key concern for policymakers as is expected to rise to around 4% in October and 5% in April 2022. The MPC stated however that inflationary pressures were “most likely to prove transitory.”
Rates could rise in the coming months
The Bank of England noted that interest rates could rise in the coming months if the economy improves. The key question now is whether the Monetary Policy Committee will announce the next rate in February when it produces its new forecasts. The possibility of a rate hike in December is just below 50%.
If there is a rate hike in December this will depend on November's job report for the October period. The labour market report on 16th of November is expected to show positive figures that reflect a healthy labour market which could support a small interest rate rise. A positive jobs report could therefore offer support to the pound.
Economists at MUFG Bank expect interest rate hikes and they have warned that the pound could fall further if the Bank fails to curb inflation. They said: “We still believe that the BoE will raise the policy rates closer to 1.00% by the end of next year. We have only pushed back the timing of our forecast for two further 0.25 point hikes in 2022, and now expect those to be delivered in May and August bringing the policy rate to 0.75%. We remain sceptical though that it will rise beyond 1.00% in 2022.”
They added that downside risks for the pound could continue building if markets become more concerned that the BoE will fail to respond to higher inflation.
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