UK interest rates expected to rise to 1.25%

USD

Yesterday the Federal Reserve embarked on their largest interest rate hike in more than twenty-five years to try combat spiralling inflation. They raised interest rates by 75 basis points.

With the Fed committed to curb inflation, tightening of credit condition is starting to have a knock on effect on the stock market and will likely slow demand and consequently impact US economy growth. Officials now believe we will see steady rate hikes throughout the rest of the year with the a strong possibility of another 75 basis points rise at the next policy meeting in July. The federal funds rate is expected to reach 3.4% by the end of the year.

Fed Chair Jerome Powell said in a press conference after the meeting “we don’t seek to put people out of work” and noted that officials are not trying to induce a recession. However these comments underline the challenges the Fed will face trying to curb a rampant forty-year high inflation.

The dollar initially lost ground against the pound after the announcement but has since recovered with the focus back on the Bank of England’s own interest rate decision this afternoon.

GBP

The BoE’s interest rate decision will be the main market mover today where we expect them to deliver a fifth straight interest rate hike to follow in the footsteps of the Fed.

Investors are forecasting an increase of 25 basis points to 1.25%, which will be a thirteen-year high. Some analysts are projecting a rise of up to 50 bps that could lead to a rally in Sterling against the dollar and euro.

The UK is facing a cocktail of high inflation and flat growth which is making the BoE’s job increasingly difficult. The economy is already showing signs of a slowdown and is the weakest among the world’s richest countries according to the International Monetary Fund. Inflation is still set to rise above 10% later this year after the central bank’s own forecasts.

The recent fall in value for the pound adds to the cost of imports including essential gas and oil. Even with future rates hikes happening, Sterling may remain weak due to the severe shortage of workers pushing salaries up sharply and this feeding into higher inflation. Additionally, the ongoing Brexit issues could lead to more trade barriers and higher prices.

The BoE is likely to signal again today that its series of rate hikes has further to run, although last month it suggested investors were going too far by pricing in Bank Rate hitting 2.5% by the middle of next year. Since then, those bets have risen again with markets pricing in Bank Rate at almost 3% as soon as December.

Key announcements

12:00 – GBP – UK interest rate decision – forecast of 25 basis points rise
12:00 – GBP – UK monetary policy
13:30 – USD – US Philly Fed Manufacturing