BoE Interest Rate Decision: Another 25 bps hike favored as UK inflation stays hot

• Interest rate decision from the UK central bank is due this Thursday.
• Bank of England is set to deliver another 25 bps rate hike, raising rates to 4.75%.
• Pound Sterling is likely to witness intense volatility on the BoE policy announcements.

The Bank of England (BoE) is on track to deliver its 13th straight rate hike this Thursday, as it remains on a firefighting mission to tame stubbornly high inflation levels.

Even though inflation has softened from the double-digit figures, the United Kingdom’s consumer price inflation remains one of the highest among major advanced economies. Therefore, the main focus will remain on the language in the Bank of England’s monetary policy statement for fresh cues on its rate hike outlook, in the absence of Governor Andrew Bailey’s press conference and updated economic projections. 

Bank of England interest rate decision: What to know in markets on Thursday, June 22

• GBP/USD is consolidating the recovery gains below 1.2800, as the US Dollar (USD) licks its wounds near monthly lows after less hawkish Chair Jerome Powell’s testimony-induced sell-off.
• Testifying before the House Financial Services Committee on Wednesday, Fed Chair Jerome Powell said: “inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go," adding that "nearly all" participants expected further rate increases.
• The UK inflation data came in hotter than expected, with the Core CPI hitting the highest rate since March 1992. Investors seem to be split between a 25 bps and 50 bps, with markets now pricing in a 52% probability for a 25 bps BoE June rate hike, down from about 78% seen before the UK CPI data release.
• Markets trade with caution early Thursday amid expectations of further central banks’ tightening. US S&P 500 futures are marginally lower while the benchmark 10-year US Treasury bond yields trade close to weekly troughs near 3.70%
• The BoE policy announcements will be key to the short-term direction in the GBP/USD pair while the US Jobless Claims and day 2 of Powell’s testimony will also hog some limelight.

Analysts at Societe Generale weighed, “could the BoE raise rates by 50bp tomorrow instead of 25bp? That’s the question after the latest inflation shock in the UK this morning. Core CPI accelerated to 7.1% yoy in May, a new record high. We know from last week that wage growth accelerated to 7.2% yoy. Both numbers are moving further away from the 2% inflation target (second round effects?) so the BoE may be forced to respond.”

“The dilemma facing the BoE is whether to extend the tightening cycle by a few months or step up the pace again to reach a higher peak sooner. Both scenarios risk causing havoc in the housing market,” Societe Generale added.

When will the BoE release its monetary policy decision and how could it affect GBP/USD?

The BoE is expected to raise the key rates by 25 basis points (bps) from 4.50% to a 15-year high of 4.75% on Thursday, June 22. The interest rate decision will be announced at 11:00 GMT, accompanied by the Minutes of the meeting.

Speaking at a parliament committee last week, BoE Governor Andrew Bailey said that inflation was taking "a lot longer than expected" to come down and the labor market was "very tight". Bailey spoke after the latest data published by the Office for National Statistics (ONS)  showed that the United Kingdom’s (UK) ILO Unemployment Rate dropped to 3.8% in the quarter to April from the 3.9% recorded in the three months to March, beating the market consensus of a 4.0% print.

Meanwhile, the number of people claiming jobless benefits dropped by 13.6K in May, compared with the expected decrease of 9.6K. The UK’s average weekly earnings, excluding bonuses, arrived at 7.2% 3Mo/YoY in April versus 6.8% prior and 6.9% expected. It’s worth noting that the April data includes the impact of a 9.7% rise in the minimum wage.

The numbers caused markets to ramp up their bets on BoE rate hikes, driving two-year government bond yields to their highest since 2008. Markets ramped up their expectations for the peak in BoE rates to as high as 6.0% by early 2024.

However, raising doubts about a potential BoE hawkish rate hike, two separate surveys released a day ahead of the UK Consumer Price Index (CPI) data showed that the UK food price inflation is easing, suggesting that it may have peaked already. “The market research firm Kantar said grocery price increases eased to 16.5% in the four weeks through June 11, down from 17.2% the previous month and the lowest reading this year. Lloyds Bank Plc said production costs for UK food and drink makers fell for the first time last month since 2016,” Bloomberg reported on Tuesday.

Wednesday’s all-important UK inflation data came in hot and reinforced the narrative that the BoE will have to keep up with interest rate increases to fight sticky inflation. According to the latest data published by the UK Office for National Statistics (ONS), the United Kingdom's annual CPI accelerated 8.7% in May, at the same pace seen in April. The market consensus was for an 8.4% increase. The Core CPI gauge (excluding volatile food and energy items) increased 7.1% YoY last month, compared with a 6.8% rise seen in April while outpacing estimates of a 6.8% clip.

That said, chances for a 50 bps rate hike appear minimal, as the Bank would refrain from dipping the UK economy into recession by going for large rate hikes. Instead, markets are expecting the BoE to lean toward multiple 25 bps hikes over the course of this year. Therefore, the policy guidance and voting composition will be key to determining the next price direction in the GBP/USD pair. At the May policy meeting, two policymakers, Silvana Tenreyro and Swati Dhingra, voted to maintain rates at 4.25%.

The Pound Sterling is likely to come under intense selling pressure should the UK central bank stick to its cautious tone in the policy statement, fuelling uncertainty on the rate hike path. The GBP/USD pair is likely to correct toward 1.2600 in such a scenario. On the other hand, the major could extend the uptrend and challenge the powerful resistance at 1.2870 on a hawkish outlook.

Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “GBP/USD has charted out a Bull Flag formation on the daily candlesticks, awaiting confirmation on the BoE interest rates decision. The 14-day Relative Strength Index (RSI) has turned flat but remains well above the 50 level, suggesting that there is more room for the upside for Cable buyers.”

Dhwani also outlines important technical levels to trade the GBP/USD pair: “On the upside, a sustained move above the 1.2780 hurdle is likely to validate the Bull Flag, fuelling a fresh upswing toward the 14-month high of 1.2849. Further up, Pound Sterling buyers will challenge the 1.2900 round figure. Alternatively, strong support awaits at 1.2672, below which a sharp sell-off toward the 1.2600 threshold cannot be ruled out.” 

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About the BoE Interest Rate Decision

The BoE Interest Rate Decision is announced by the Bank of England. If the BoE is hawkish about the inflationary outlook of the economy and raises the interest rates it will be positive, or bullish, for the GBP. Likewise, if the BoE has a dovish view on the UK economy and keeps the ongoing interest rate, or cuts the interest rate it will be