The pound sterling rose to its highest level since August on Thursday, as the Bank of England (BoE) signalled that it would not cut interest rates in the near future, despite the looming threat of inflation and recession.
The BoE’s Monetary Policy Committee (MPC) voted 6-3 to keep the Bank Rate unchanged at 5.25%, the highest level in 15 years. The decision was in line with market expectations, but contrasted with the US Federal Reserve’s dovish stance, which indicated three rate cuts in 2024.
The BoE’s governor, Andrew Bailey, said that it was too early to consider lowering interest rates, as the UK economy was facing a “very unusual” combination of high inflation and weak growth. He said that the MPC would do “what it takes” to bring inflation down to the 2% target, but also warned that monetary policy would need to remain restrictive for “an extended period”.
The BoE’s latest forecasts showed that inflation would peak at 5.4% in the second quarter of 2024, before falling back to 2.2% by the end of 2025. The BoE also revised down its growth projections for 2024, from 1.8% to 1.4%, citing the impact of the Omicron variant of Covid-19 and supply chain disruptions.
Pound strengthens against dollar and euro
The pound reacted positively to the BoE’s hawkish tone, as traders reduced their bets on rate cuts in 2024. The pound climbed to $1.275 against the US dollar, the highest level since August 2023. The pound also gained against the euro, reaching €1.18, the strongest level since October 2023.
Analysts said that the pound’s rally was driven by the divergence between the BoE and the Fed, as well as the UK’s relatively high vaccination rate and rapid booster rollout. They also said that the pound could benefit from a potential resolution of the Brexit-related disputes between the UK and the EU, which have weighed on the currency in recent months.
However, some experts cautioned that the pound’s strength could be short-lived, as the UK economy still faced significant challenges and uncertainties in 2024. They said that the BoE could be forced to cut interest rates if the Omicron variant caused more severe lockdowns and damage to the economy, or if the inflationary pressures proved to be more persistent and widespread than expected.
UK economy expected to ‘turn corner’ in 2024
Despite the gloomy outlook for the first half of 2024, the BoE expressed some optimism that the UK economy would “turn the corner” in the second half of the year, as the impact of the Omicron variant faded and the supply chain bottlenecks eased.
The BoE said that the UK economy had shown “considerable resilience” in the face of the pandemic, and that it expected a “gradual recovery” in consumer and business confidence, as well as a “modest pickup” in investment and productivity growth.
The BoE also said that the UK economy had some “underlying strengths”, such as its flexible labour market, its innovative and dynamic sectors, and its strong trade and financial links with the rest of the world. The BoE said that these factors would help the UK economy to adapt and prosper in the post-pandemic era.