BoE rate rise: GBP takes a hit on recession outlook

[MongiIG]

The Bank of England raised rates by 75bps, as expected, but sterling continued to drop after the event.

 Jeremy Naylor | Writer, London | Publication date: Thursday 03 November 2022 

The press conference was the more interesting event with Governor Andrew Bailey elaborating on what was happening.

He said the Bank’s best case was that while rates are likely to peak at less than market expectations, much, if not all, of 2023 will be spent in a contraction.

(Video Transcript)

BoE raises rates

Well, the Bank of England (BoE) has done exactly what the markets were expecting and raised interest rates by 75 basis points (bps) up from two and a quarter to 3%.

Now, it's the biggest single jump that we've seen in more than 30 years. As I said, it was widely expected. But subsequent to this decision, we've seen more flesh on the bones coming through from the press conference.

Going into the press conference, we knew that seven of the nine voting members voted to raise rates by 75 basis points, one voted to raise rates by 50 basis points and one still voted to raise interest rates by 10.25%.

But I think it's most telling, looking at what's happened subsequently in the press conference, because governer Andrew Bailey was talking and he was saying that if the Bank of England does not act forcefully now, it will be a lot worse later on. He said that they can't make promises as a voting committee about future interest rates, but based on where we stand today, they think bank rates will have to go up by less than currently priced in by the financial markets.

The unfortunate thing is, is that we're going to spend much, if not all, of next year in recession. Looking at the start of a recession coming through in the fourth quarter (Q4) of this year with a contraction of GDP by a margin of 0.5%.

Now, the Bank of England forecast the country's GDP decline by that margin in the third quarter this year, going through into the fourth quarter and recession and then throughout next year down in contraction.

GBP

Let's take a look at how this market has been traded because we've got sterling down and you can see if you look at today's candle, it continues to fall. We're now trading below the 112 level, 11178, not too far away now from the red dotted line, which was the base established back on the 12th of October when we saw that recovery on from the Kwasi Kwarteng fiscal statement.

The unfortunate thing is, the Bank of England is acting without any knowledge of what the Treasury is thinking. Chancellor Jeremy Hunt is coming through with his fiscal statement in a week or two's time. But we've seen pressure building for sterling, not just against the US dollar but also against the euro. You can see almost pretty much at the bottom of that candle, so whichever way you cut, it has been negative for sterling.

But if anything, base rates may not have to go as high as previously thought.