Bank of England Increases UK Interest Rate, GBP/USD Jumps

[MongiIG]

BANK OF ENGLAND, GBP PRICE, NEWS AND ANALYSIS:

• The Bank of England’s monetary policy committee has voted by eight votes to one to increase UK Bank Rate to 0.25% from 0.1%.
• The initial reaction to the news was a jump in GBP/USD as the markets were undecided beforehand whether the MPC would raise rates or leave them unchanged.

 

GBP/USD JUMPS AS BAND OF ENGLAND RAISES UK INTEREST RATE

GBP/USD has strengthened after the Bank of England’s monetary policy committee voted by eight votes to one to increase UK Bank Rate to 0.25% from 0.1%. The markets had seen the decision as being in the balance as the MPC weighed up surging UK inflation on the one hand and fears of an economic slowdown caused by the rapid spread of the Omicron coronavirus variant on the other.

There was a majority of 9-0 to maintain the amount of quantitative easing at £895 billion.

GBP/USD PRICE CHART, FIVE-MINUTE TIMEFRAME (DECEMBER 16, 2021)

Source: IG (You can click on it for a larger image)

 

MPC DILEMMA

The dilemma faced by the MPC ahead of its decision was whether a tightening of monetary policy was needed after news that UK inflation jumped in November to a decade-high 5.1%, more than twice the 2% target, or whether it should leave rates on hold because of fears about weak economic growth.

Adding to the uncertainty, there was little guidance in advance from the BoE to the markets after it surprised them by leaving rates unchanged at its previous meeting.

DISAPPOINTING UK PMIS

Ahead of the latest BoE decision, data from Markit/CIPS showed that the “flash” December composite UK purchasing managers’ index was down sharply to 53.2 from 57.6 in November, well below the consensus forecast of a dip to 56.4. The services sector of the UK economy was especially weak as the spread of the Omicron coronavirus variant hit hotels, restaurants, travel and transport.

Source: DailyFX calendar

Looking ahead, a by-election in North Shropshire to vote on a new Member of Parliament for the area takes place Thursday, with the result due early Friday. Normally, this would have no impact on the markets but the by-election is being seen as a referendum on Prime Minister Boris Johnson’s leadership so if his Conservative Party loses the seat it could have an adverse effect on Sterling assets as it would highlight the current political instability in the UK.

 

Written by Martin Essex, Analyst, 16th December 2021. DailyFX