The pound had been trading in the middle of the pack against the US dollar, until the Bank of England announced it was raising rates by 75bps, although there was dissent on the size of the move, and then spent the next hour undermining that hawkish move in what can only be described as “Operation Protect the Housing Market”.
The key message was that rates were unlikely to go anywhere near as high as markets were pricing, although they were still expected to rise, and that the UK economy was likely to face a 2-year recession.
Of course, if the bank hadn’t kept rates low for so long and even flirted with the idea of negative rates as recently as two years ago, they wouldn’t be in the unholy mess they are in now.
As it is the pound has slipped back from levels of just shy of 1.1500 in the aftermath of the Fed meeting last night to below 1.1200 in less than 24 hours ,which is only likely to help keep upward pressure on prices over the next few months.
It also serves to make their current job of controlling inflation that much harder and raises questions about the banks’ own inflation predictions that CPI will fall back to 5.6% at the end of 2023, as it looks to peak at 10.9% later this year.
While most of the narrative from today’s press conference was about the fallout from the September mini-budget, and the effect on financial conditions since then, it rather overlooks the Bank of England’s role in allowing inflation levels to get where they are now.
A clear case of recent political missteps giving the central bank a “get out of jail free” card when it comes to their own culpability in the current crisis.
While 10-year gilt yields have shot higher, UK 2-year yields are unmoved, reflecting the slightly lower markets rate path.