GBP – BoE hike 0.5% to 5%, with expectations of 6% this year

Markets were fully expecting a rise in interest rates from the Bank of England last week.  However, with the higher-than-expected inflation data and wage growth, we saw the BoE hike rates by 0.5% instead of 0.25%.  It is likely that the committee felt forced to take further action after the increase in core inflation to 7.1% from 6.2% a couple of months ago.  The markets now expect a peak in interest rates to be around 6%.

Following the larger hike by the Bank of England, rates are expected to rise again in August and September and to be at 6% at the end of the year.  The BoE’s forward guidance didn’t give much clarity on their next move, saying that further tightening would be required if there is more persistent inflationary pressure.  Upcoming speeches this week by BoE members Dhingra and Tenreyro, BoE Governor Bailey and Chief Economist Pill.

This week, the CBI’s retail survey and the BoE’s bank lending data will provide some indication of how the economy is holding up to rate hikes.  We will also get further detail on consumer spending in the second reading of Q1 GDP.  Last week, we saw consumer confidence rise in June, with retail sales also higher for May. The forward-looking PMIs were less positive, suggesting that the economy may cool in the second half.

GBPEUR – 1.1660

GBPUSD – 1.2730

EUR – ECB conference hosting central bank speakers

Given the hawkish comments from ECB policymakers, markets expect a further interest rate hike in July. This week, we have a further round of inflation data which is unlikely to affect this view.  Markets expect a fall in headline inflation to 5.5% from 6.1%.  However, we expect to see a rise in the core rate to 5.5% from 5.3%. Overall, this seems unlikely to reduce ECB policymakers’ concerns about inflation. The Norges Bank increased rates by 0.5%, while the Swiss National Bank hiked by 0.25%, as widely expected.

The ECB is hosting a conference this week, which will see a panel of speakers including the heads of the European Central Bank, the US Federal Reserve, the Bank of England and the Bank of Japan.  This may provide insights into the outlook for monetary policy globally. The picture seems widespread, with rates expected to move higher as we see big drops in headline inflation but stickier core rates.

EURUSD – 1.0918

EURGBP – 0.8576

USD – Inflation likely to lead to Fed hiking again

Following on from other central bank actions, the Federal Reserve Chair Powell testified to Congress last week.  He suggested the Fed’s decision to pause US interest rate hikes is likely to be short-lived. With inflation remaining sticky, the Fed may well hike rates as soon as their next meeting.  As a result, global stock markets declined whilst short-dated bond yields were mostly higher in anticipation of higher rates. Markets are only pricing in one further hike of 0.25% this year, as they expect the economy to weaken.

This week, the Fed’s preferred inflation measure, the consumer expenditure deflator, will be released. This is expected to show a fall in annual inflation to 3.8% from 4.4%, though the core rate is expected to remain at 4.7%. Consumer spending data is forecast to show a rise in spending, which supports the idea that the economy can cope with higher interest rates.

GBPUSD – 1.2730

EURUSD – 1.0918

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*Interbank rates are correct at 7am on the date of publishing.