BoE: A 25 bps rate hike could trigger some initial disappointment and Pound selling – MUFG

The main event today will be the BoE’s latest policy update. Economists at MUFG Bank analyze how GBP could react to the Interest Rate Decision.

Will BoE disappoint expectations for more aggressive rate hikes?

If the BoE raises rates by 25 bps as we expect then it will trigger some initial disappointment and Pound selling. The initial sell-off could be dampened by the BoE continuing to send a hawkish signal that it is prepared to hike rates further in response to fears over more persistent inflation in the UK. 

At the same time, there is some speculation that the BoE will announce updated plans for quantitative tightening. The BoE halted reinvestments of its maturing gilts and has been actively selling gilts since September targeting a GBP80 billion annual reduction in their QE portfolio. The BoE is expected to announce a higher target for the next twelve months from October 2023 to September 2024 as more gilts totalling GBP50 billion are set to mature in the next twelve months. It could offer some modest support for the Pound if the BoE steps up active sales as well.