Pound Sterling monitors at the HSBC Holdings Plc are closely observing every detail surrounding the British Pounds as the Bank of England goes in a policy meeting on Thursday.
Economists are speculating that the Bank of England will increase interest rates to 0.5% and, with the same action, instigate a passive balance-sheet decrease. While the money market has almost fully priced in the interest rate increase, putting a limit on the scope of the Pound’s upside, the BOE could still come up with a hawkish policy through its inflation forecast and further discussions of active monetary policy tightening.
HSBC’s Head of European Currency Research stated that a major reason for the bank’s long-term skepticism on the British Pound was the flatness of the interest rate curve. He added that if terminal rates were increased much higher, it has the potential of providing more reasons for rate increases, and it will establish a less negative background for the Pound.
The Pound is having a good time as it is currently trading within its strongest point in about two years against the Euro, powered by expectations that the Bank of England’s tightening period will be ahead of the European Central Bank’s process by far. Money marketing experts are speculating on up to 125 bps of increase in the UK by the end of the year, in contrast to about 25 bps increase expected in the Eurozone.
Politics and Finance
The Pound managed to rally 83.05 to one Euro on Monday before it paired gains, as the British PM Boris Johnson is scheduled to deliver a statement to Parliament soon.
Bunning was quoted to have said that the most recent Bank of England prediction shows inflation scaling back to a 2% target in 2024. If the latest predictions don’t indicate a rapid or at least a slow return, it may be a red flag that officials are working towards seeing an aggressive rate-increasing cycle priced in that it would potentially support the pound’s strength.
He said further that a sign of active gilt being on sale could increase UK yields and the standing of the pounds. While the US Federal Reserve plans to stop buying bonds in March, the Bank of England also said it is considering active bond sales of its holdings as soon as the policy rate gets to 1%, which is targeted for June.
It is, however, unclear if the Bank of England will commence the bond sales immediately or at a later time after reaching 1%. The August 2021 report of the BOE said that officials prefer to use the bank’s rates as an active instrument in most cases.