A 25 bps rate hike is all but confirmed
The BOE will raise the bank rate from 0.25% to 0.50% today and that will be the trigger point for its balance sheet reduction i.e. quantitative tightening. The thing about the rate hike today is that it is all but priced in already, so that will limit any upside potential for the pound. Hence, it is in other areas where we will see more of a market reaction.
What next on the inflation front?
The BOE's take on inflation is what is going to set the tone for sterling assets in my view. If they foresee inflation to keep higher i.e. upping their inflation forecast, that will be interpreted more hawkishly surely. The current outlook is that policymakers see inflation falling back below 2% by the end of 2024. So, we'll see how they toy around with that this time around.
A step up in the inflation forecast could signal a quicker pace of rate hikes or perhaps even a higher terminal rate - both of which will keep pound bulls in a favourable spot.
Any other hawkish setups?
I would argue that the BOE will try and play things a bit "slower" now and not overcommit to any aggressive tightening moving forward, even if they know they have but little choice to do so. It is all to just manage market expectations and also give them some flexibility if and when it comes to viewing future inflation data.
That said, they surprised with a rate hike in December and could very well deliver more hawkish undertones in teeing up the next move for March as inflation pressures are rather rampant at the moment in the UK.
Otherwise, in the absence of a change on the inflation view and a more subtle approach in laying out their tightening procedure, the pound could see gains more limited though this EUR/GBP chart is one to keep an eye out for if anything else.
