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The Pound and Bank of England in the race for higher interest rates

Since the global pandemic began and central banks reacted to the uncertainty by slashing interest rates, there's been a natural focus on which nation will see a tapering of asset purchases and interest rate rises first.  


'Unreliable' bankers and interest rates   

It used to be that former Bank of England Governor, Mark Carney, was known as the 'unreliable boyfriend' of the banking world. His comments regarding rate direction and other matters would seemingly not come to fruition, and markets stopped knee-jerk reacting to his statements. While there's a new Bank of England Governor in town now, there have been a few false alarms from BoE policymakers, which haven't helped with market clarity. 

In November, the BoE voted 7-2 to keep interest rates on hold—defying investor expectations that it could be the first major central bank to hike rates since the coronavirus pandemic. Rates remained at a historic low of 0.1% and maintained their current pace of government bond purchases. While some investors had thought the rate hike was coming in November, others argued that if it wasn't November, there should be one by the end of the year, with the bank having another chance to change its stance in the upcoming 16th December meeting. 

The Pound dipped sharply in response to the no-change decision, with both the Euro and the US Dollar racking up gains against it. The Monetary Policy Committee said following the announcement: 'The Committee judges that, provided the incoming data, particularly on the labour market, are broadly in line with the central projections in the November Monetary Policy Report, it will be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.' 

Furlough, inflation, and cautiousness 

The bank also said that the uncertainty surrounding the end of the furlough scheme in September had factored into its decision to keep interest rates on hold. A strong labour market is one of the key conditions looked at when considering a rate hike, so the uncertainty due to furlough could have been an understandable precaution. However, the unemployment rate has been falling, and the tighter labour market has been bolstering wages. Economists believed that given the UK's employment market, rate increases would happen at the close of this year and next year—but now markets have been careful not to hang on the words coming from policymaker lips. 

Another factor encouraging rate hike expectations is inflation, which has been squeezing British consumers. While inflation in the UK slowed in September on the year, economists have suggested it was a temporary reprieve for consumers. The August reading of a climb of 3.2% on the year—considerably above the BoE's 2.0% target—was the most significant increase on records dating back to 1997; however, the October print blew it out of the water. UK inflation rose to 4.2% in October, a ten-year high, and more than double the central bank's target. The Bank of England has forecast a rise to 5.0% by spring 2022, before easing to the target rate in the latter half of 2023. 

Omicron and UK interest rates 

But what does it mean now the new Omicron Coronavirus variant has come to light? As the new variant has hit the news; countries are imposing travel restrictions in a bid to ease the spread, while the hospitality sector has noted a fall in the number of bookings being made, in what's thought to be a crucial time for many businesses—particularly after many have spent considerable amounts to become more Covid-secure. News outlets have reported restaurants noting cancellation after cancellation, and while British Prime Minister Boris Johnson has suggested another lockdown is unlikely, many consumers are still concerned. 

To raise interest rates at a time where economic growth could potentially slump—particularly given the UK's services sector makes up around 70% of GDP—and restrictions could come into play once again, may seem unwise to BoE policymakers. BoE policy maker Michael Saunders, who voted for higher rates at the last meeting, has also recently cast doubt on whether he’d take a hawkish stance again, claiming he’d like more information about the impact of Omicron. It certainly gives policymakers more to think about and provides opportunity for further Pound volatility in the weeks leading up the Bank of England December rate decision, as well as in the months ahead. 

If you'd like to find out more about how you can make the most of your currency transfer during times of uncertainty, contact a member of our team, on 020 7989 0000.