Bank of England’s Monetary Policy Committee Preview

The Bank of England’s Monetary Policy Committee will meet tomorrow to decide on interest rates. The MPC meeting will be sandwiched between FOMC rate decision that will have taken place today, and the ECB rate decision that would follow an hour and a bit later. The GBP/USD, EUR/GBP and FTSE will be among the markets in sharp focus on the day.

The consensus is that the BoE will show the pace of hiking, as we are expected to see with the week’s other major central bank decisions. Economists expect the UK central bank to raise the benchmark interest rate by 50 basis points, which would bring the Official Bank Rate to 3.5%. If correct, this will mean the previous 75 basis point hike was just a one off.

At the previous meeting, the BOE hiked rates by 75bps but warned that the terminal rate will be lower than markets are anticipating due to a current recession, which could last up to 2 years. The pound nonetheless rallied and reached north of $1.24 handle by Tuesday, when a much-weaker-than-expected US inflation report sent the dollar and treasury yields plunging.
It will be interesting to see what the BoE will make of the latest upsurge in inflation. Since their last meeting, UK CPI has risen further, from 10.1% YoY in September to 11.1% YoY in October. It should be noted that the November CPI reading is due out today, the day before the BOE meeting. Expectations are for CPI to fall to 10.9% YoY. If the reading is higher, could the MPC surprise the markets and hike by 75bps ? while that could be a possibility, it is worth pointing out that the UK is facing several other risks too.

The GBP/USD broke above the key 1.2300 resistance level, which had previously capped the gains back in August and more recently at the start of this month. So, the path of least resistance was the upside at current time. However, with the Fed and BoE both set to meet this week, things could look and feel a lot different later in the week. If by tomorrow afternoon the GBP/USD is still holding its own above this 1.2300 level, then the path of least resistance would remain to the downside towards 1.2500, possibly even 1.2750, where the 61.8% Fibonacci level comes into play.