BoE Hints at Sooner-than-Expected Rate Hike, GBP Exchange Rates Soar
The Pound Euro (GBP/EUR) exchange rate rallied on Thursday as markets reacted to a range of hawkish and optimistic soundbites from the Bank of England’s (BoE) first interest rate decision of 2018.
The bank voted unanimously to hold the key interest rate at 0.50% on this occasion (as markets widely expected), though the inclusion of certain hawkish additions in the Monetary Policy Committee’s (MPC) accompanying statement and updated growth forecasts for 2018/19 were of particular interest to the markets.
The accompanying statement featured suggestions that a rate hike could be warranted sooner-than-expected – as long as the UK’s economy continues to develop as expected.
A key section read:
‘Were the economy to evolve broadly in line with the February inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report’.
Beyond this, the bank’s updated growth forecasts indicated that the UK’s economy is expected to expand at a faster pace than previously thought.
The forecasts were as follows:
- 8% in 2018 (vs 1.6% previous)
- 8% in 2019 (vs 1.7% previous)
- 7% in 2020 (vs 1.7% previous)
Combined, markets have now overwhelmingly come to expect a rate increase from the bank as early as May – a prospect that sent the Pound flying.
EUR Exchange Rates Slide as ECB Bulletin Highlights Inflation Worries
Euro (EUR) exchange rates took a tumble today in response to a disappointing drop in Germany’s trade surplus, and the latest European Central Bank (ECB) economic bulletin, which once again highlighted inflation issues within the bloc.
Whilst the majority of the bulletin was largely in line with the general tone of forecasts, it notably asserted that growth in the bloc might not translate into increased price pressures.
The bulletin stated:
‘While the Governing Council’s confidence that inflation will converge towards its inflation aim has strengthened, domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend’.
This likely means that the ECB will not be making hawkish policy adjustments for an extended period of time.
In other news Germany’s trade surplus dropped from EUR 23.7b to EUR 18.2b, below the forecast drop to EUR 21.0b.
This marked the first shrinkage in Germany’s trade surplus in 8 years – but the surplus continues to remain extremely high.
GBP/EUR Exchange Rate Forecast: UK Trade Balance Ahead
The Pound Euro (GBP/EUR) exchange rate could see some movement tomorrow depending on the result of a run of UK ecostats.
Markets will be assessing UK industrial production, manufacturing production, construction output and the UK’s trade balance, with markets expecting a slight drop in the UK’s trade deficit from -£2804 to -£2400.
The UK’s production figures are currently forecast to be soft, with December’s construction reading expected to slip from 0.4% year-on-year to -1.9%, manufacturing from 3.5% to 1.2% and industrial production from 2.5% to 0.4%.
Whether this fall will be enough to stop the Pound’s current surge remains to be seen, however – it is entirely possible that markets will be more interested in today’s hawkish comments, thus extending GBP/EUR’s lead into the weekend.