Bank of England Pauses Hiking Cycle – Sterling Update

Here’s the latest currency news from our partner Moneycorp, to help you find out what your money is worth.

GBP

After an eventful week last week, GBP/USD declined slightly overall, with the pound slipping by around 0.3% by last Friday’s close. This week, Sterling has fared slightly better, finishing the week with mild strength against the dollar, although the dollar’s recent domination continues to be the biggest driver of short-term moves in the currency pair. The pound and the euro remain almost unchanged from the previous week.

This week’s most significant event was the Bank of England’s rate decision on Thursday. As the markets expected, the committee voted to pause its hiking cycle for the second time. At October’s meeting, the decision was a particularly close call, with the nine-member committee voting 5-4 to maintain rates at 5.25%. This time, the pause was slightly more favoured overall, with the voting spread falling at 6-3.

The decision followed the broad economic slowdown witnessed throughout the UK lately. The previously robust labour market has shown signs of moderating, coupled with weak consumer demand (Retail Sales), ongoing tepid growth (GDP +0.2% in August) and weak PMIs for both manufacturing and services sectors. As we have highlighted previously, a significant concern for the BoE remains persistent UK inflation. Although it has moderated throughout much of this year, the latest figures suggest an evident slowdown in the pace of declines, with annual headline inflation remaining at 6.7% in September. With the temperature getting cooler and energy prices experiencing a spike, this could add to any inflation concern over the winter period.

A combination of these factors has meant the BoE has not shut the door on potential future rate hikes should inflation remain elevated for longer. Governor Andrew Bailey warned monetary policy will need to stay tight for “an extended period of time” despite a bleak economic outlook in his press conference following the decision. He added that the MPC would be watching “closely” to see if further rate rises were needed and that it was “much too early to be thinking about rate cuts.”

EUR

As widely expected, the European Central Bank (ECB) left its key policy rates unchanged at last week’s meeting, ending its streak of 10 consecutive interest rate hikes. During that time, the ECB had raised rates by an unprecedented 4.5%.

Much like in the UK, recent European data has highlighted an increasing slowdown in economic output throughout the region. Although there have been a few current bright spots – the German manufacturing PMIs and forward-looking IFO surveys, for example – those improvements have been from a shallow base, with sluggish activity witnessed elsewhere. During her post-meeting conference, ECB President Christine Lagarde implied that the ECB could hike rates again, although markets currently remain somewhat sceptical. However, this week promises to add some clarity to the outlook for the ECB, with the latest German and Regional inflation reports giving markets the first glimpse of Q3 data. Although sticky core inflation had dominated of late, recently, higher energy costs could put upside pressures on headline inflation.

Among other key incoming data this week, the outlook was mixed. The latest German growth data (GDP) showed the economy shrink less than expected in the previous three months, but Retail Sales came in worse than forecast.

The single currency has fared slightly better this week, also strengthening mildly against the dollar, following declines in 13 of the past 15 weeks. Last week, the pair slipped by 0.33%, with the resurgent dollar dominating.