GBP Faces Downside Risks Amid Bank of England's Interest Rate Decision

GBP: Some downside risks to sterling

The Bank of England announces its interest rate decision and releases a new Monetary Policy Report (MPR) at 1300CET today. Most analysts expect a 25bp hike in the Bank Rate to 5.25%, but a significant minority are looking for a 50bp rate hike. Money markets price around 32bp of tightening today.

Despite the welcome UK June CPI figures, no one expects the BoE to let its guard down on inflation and its statement will likely retain words to the effect that rates could be raised further were there evidence of more persistent price pressures in the economy. The market will also be looking out for the CPI forecasts in the monetary policy report and also whether the BoE has anything to say about Quantitative Tightening (QT), currently running at a pace of £80bn per annum. Some are arguing that QT could be accelerated to well over £100bn p.a.

A slightly risk-off environment and our baseline call of the BoE only hiking 25bp could be a mild negative for sterling – especially were the BoE to go further than the Fed in acknowledging the process of disinflation. For cable that means an outside risk of a drop to the 1.2580/2600 area (depending on the dollar environment), while EUR/GBP could be correcting back to the 0.8640 area.