Pound Dives After Bank of England Signals Caution as It Raises Rates
Comment of the Day

May 05 2022

Commentary by Eoin Treacy

Pound Dives After Bank of England Signals Caution as It Raises Rates

This article from the Wall Street Journal may be of interest to subscribers. Here is a section:

Six MPC members voted for the rate rise to 1%, while three voted for a larger rise to 1.25%.

The central bank also said it has asked its staff to prepare a plan for selling some of the bonds it bought as part of its past stimulus programs. That plan is set to be outlined in August, but bond sales would start later.

However, the central bank indicated that it is likely to raise rates more slowly, if at all, in coming months, with the very high energy prices that have followed Russia's invasion of Ukraine set to squeeze household spending power and weaken economic growth.

In its statement, the BOE said further rises in its key rate "may still be appropriate" in coming months, but added that two of its policy makers didn't support that guidance and instead thought it likely the key rate would stay at 1%.

"There were risks on both sides of that judgement," the BOE said.

That greater caution is a contrast with the Fed, which Wednesday approved a rare half-percentage-point interest-rate increase to a target range between 0.75% and 1%. Fed Chairman Jerome Powell said at a news conference that officials broadly agreed that additional half-point increases could be warranted in June and July given current economic conditions.

Eoin Treacy's view

The Pound rebounded yesterday and reversed that advance today following the reluctance of Andrew Bailey to talk about continued interest rate hikes. The decision was a long way from unanimous, which highlights the difficulty of containing inflation without causing a recession.

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