The British Pound Sterling (GBP) is striving to maintain its position above 1.2700, leveraging the ongoing recovery trend, as market sentiment begins to recover, and the Bank of England (BoE) puts forth a bullish interest rate decision. With an increase in interest rates by 25 basis points (bps) to 5.25% – the highest in 15 years – the GBP/USD pair is looking towards further gains. The central bank keeps the option open for additional policy tightening, given the current inflation rate is significantly distant from the preferred 2%.
Bank of England Governor, Andrew Bailey, ensured that inflation in the United Kingdom is expected to ease to 5% in October, as food inflation seems to be reaching its peak. However, persistent inflation in services could maintain the inflationary pressure in the future. Simultaneously, the central bank’s assertive rate-tightening cycle has heightened concerns of a potential recession, as sectors like housing and manufacturing could face increased pressure.
Daily Digest Market Movers: The British Pound Sterling Capitalizes on Bullish BoE Policy
The Pound Sterling is managing to stay above the 1.2700 level following a substantial recovery, as the risk appetite of market participants improves. Furthermore, Governor Andrew Bailey’s openness to further policy tightening is bolstering the currency.
On Thursday, the BoE lifted interest rates by 25 bps to 5.25% to tackle stubborn inflation, marking the 14th consecutive interest rate hike. Among the nine members of the Monetary Policy Committee (MPC), BoE policymaker Swati Dhingra preferred a steady interest rate policy, while BoE’s Haskel and Mann backed a 50 bps interest rate hike.
Governor Bailey dismissed the possibility of a 50 bps interest rate hike, stating the central bank would maintain interest rates as “sufficiently restrictive for a sufficient period” to ensure inflation returns promptly to 2%. Supporting this stance, BoE Deputy Governor Ben Broadbent emphasised that maintaining relatively high rates over an extended period was key to curbing inflation.
Regarding the inflation outlook, Bailey anticipates that inflation will decrease to 5% by October.
These dynamics in the GBP and the UK’s monetary policy have implications for South Africa. Changes in the GBP can impact the Rand (ZAR), given the financial ties between the two countries. Furthermore, the BoE’s stance on policy tightening could influence how the South African Reserve Bank manages its own monetary policy. As such, these developments deserve close attention from South African investors and policymakers.