What next for GBP after BoE’s meeting?

The BoE will have more to say on the policy outlook on June 24, 2021 although few are expecting this Bank to say very much that is new. 

On one side, there is the bullish possibility of a more hawkish Bank of England (BoE) but, on the other, the continued impact of Brexit, in view of Standard Bank, could weigh GBP down.

The BoE will have more to say on the policy outlook on June 24, 2021 although few are expecting this Bank to say very much that is new. While the Fed feels compelled to spell out the path of bond buying, and then the possibility of rate hikes, many months in advance, the BoE gives little such notice. The current QE target of GBP895bn should be hit around year-end and, sometime before then (likely in November) the Bank will tell us if the target is to be lifted again to allow the Bank to buy some more bonds.

“We think it is likely to decide against a new target and hence there will be none of the, frankly silly, ‘talking about talking about tapering’ that we hear the Fed, and probably none of the actual tapering either. Instead, bond buying will probably just stop next year, apart the reinvestment of maturing bonds to keep holdings flat at around GBP895bn. Hence, the whole thing is likely to be more sudden and aggressive than the Fed and probably many other central banks, but just whether that gives GBP a lift remains to be seen. After all, the Fed is the key central bank and if its softly-softly approach to tapering and rate hikes looks even a fraction too hawkish to the market. USD is likely to rise against GBP, just as we have seen since last week’s FOMC meeting”, MR. Steve Barrow, Head of G10 Strategy at Standard Bank forecasted.

As for UK base rate hikes, the Standard Bank suspects that the BoE will act before the Fed. The BoE is still acting on a policy of trying to judge the closing of the output gap, the effect will have on inflation, and then raising rates ahead of any clear rise in structural inflationary pressure to stop price pressure taking hold. In contrast, the Fed is prepared to run the economy hot, take unemployment below the traditional full employment level and only then to start to lift rates when it sees the whites of inflation’s eyes given its new outcomes-based policy. All this suggests to us that if the UK and US were at exactly the same economic point, facing the same inflation threats, the BoE would hike before the Fed. As it stands, the UK may be slightly behind the US, but not enough to reduce the chances that the BoE will hike first. In sum, then, the monetary policy outlook should, in theory at least, work to the benefit of GBP against USD.

But monetary policy is not the only factor of course. Another major issue is Brexit and, on this, we can’t help but feel that the support for GBP monetary policy is being counterbalanced by Brexit woes. Data continues to suggest that the teething problems associated with the new EU trade deal this year are greater than feared. It is not just that the contentious Northern Ireland protocol, which effectively puts a border down the Irish sea between Great Britain and Northern Ireland, seems unworkable, but also that trade with EU countries is proving far harder to do than anticipated. For a start, there’s a danger that the price rises we are seeing in the UK are not just the result of the supply-chain issues that are being seen the world over, but also a consequence of Brexit as well as border checks, extra documentation, and more increase the cost of doing trade. To some extent these difficulties lie under the surface a bit, while Bank of England policy, which could spur on GBP, is very clear. This suggests to us that the broad trend for GBP against the likes of USD – and EUR – will be higher. But occasionally, Brexit strains will come to the surface, as they are threatening to do right now over the Northern Ireland protocol and it is, perhaps at these times that the sterling bulls need to stand back and let things play out before buying GBP.