Sterling remains supported against both the Euro and the US Dollar ahead of this week’s interest rate decision from the Bank of England. GBP/EUR in particular has also continued to be supported by the fact the Euro is weaker due to the problems in Catalonia.
The question we’re being asked at the moment is, will the Bank of England raise interest rates this week, and if they do, will it strengthen the Pound further and push exchange rates higher?
If the bank raise rates, how might it affect the Pound?
I believe that the Bank of England will raise rates by 0.25% up to the 0.5% level. The markets are also widely expecting this, and this has already been priced into the value of Sterling. What will be key to whether the Pound moves higher or lower, will be: how many of them voted for a hike, what they say about future interest rate hikes, and any forecasts they may give about inflation and growth in the UK.
There are 9 members of the Monetary Policy Committee (MPC) at the BoE that vote on whether to rise rates. In recent decisions only 2 of them have been voting for a hike. This week we think that 6 will vote for it, and it’s a majority decision. If the number that vote for a hike is lower than this, then Sterling may actually fall as it makes it less likely that we’ll see any further moves in 2018. If all 9 vote for a hike then this may push the Pound higher.
Given that it has been 10 years since we saw a rate hike, it’s impossible to really foresee what effect it will have on the Pound. Come Thursday lunchtime when the event happens, exchange rates could react in any way and it could be unpredictable, due to the fact much of the decision has already been priced in.
Personally I don’t think that a vote to raise rates will necessarily push the Pound significantly higher. It’s already priced in, and it will only be a small 0.25% rise anyway, with it quite unlikely in my view that we will see rates move higher than that in the short to medium term. For GBP/EUR rates in particular, it’s important to note that once the decision has been and gone, focus will return to other things like the Catalan Crisis and the ongoing Brexit talks. Both of these things could progress to be negative for exchange rates. If the Catalan independence bid fizzles out then the Euro would probably strengthen, pulling GBP/EUR lower again. There are also significant downside risks for the Pound should Brexit talks break down.
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