View from the Trading Desk

Today, as expected, the Bank of England voted to raise the UK’s headline interest rate by 0.25% to 0.50%; however, a great many headlines will be drawn from the four officials that voted for an immediate 50bps hike--a move which could be a mistake. Indeed, the notion that the UK’s central bank was just one hawk away from an immediate half-point rise in rates caused a material jump for the Pound, which hit its highest level against the Euro in almost two years. However, when factoring in the language used by Governor Andrew Bailey in the post-announcement press conference, it’s clear that market pricing of rates at 1.5% by December could be overdone.

From our perspective, we think Governor Bailey summarised conditions perfectly when he said it’s a mistake to assume that rates are on the long march upwards. While we may see some short-term upside for the Pound, the likelihood is that the BoE will raise rates aggressively to 0.75% or 1.00% in the near term, before pausing to see the combined effect of both this and plans for quantitative tightening. 

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