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BoE still needs to do more

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By Jameel Ahmad, Chief Analyst at CompareBroker.io  

There were no surprises that the Bank of England increased interest rates once again on Thursday. It was widely expected, and they were raised 25 basis points to 4.5%.

UK interest rates now stand at the highest level since late 2008, which was during the early stages of the global financial crisis. However, there is a real likelihood that the United Kingdom will encounter even more rate increases over the coming months because the BoE has taken a very conservative stance towards tackling inflation.

Inflationary pressures are persistently high and there is low hope of inflation stress easing significantly in the near future.

Questions do need to be asked as to why the UK central bank has increased rates at such a slow and gradual pace, when it was abundantly clear from a year ago how fast inflationary pressures risked getting out of control.

In comparison, the Federal Reserve raised U.S. interest rates at the most aggressive pace in decades, including hiking rates by 50/75 basis points at a time, and we are starting to notice some signs of inflationary pressures cooling off in the United States economy.

As such, the conversation is slowly turning towards when the US central bank might be able to reduce rates as it appears that the Fed has done as much as it can, while the conversation in the UK remains to be seen over how high interest rates could go.

It might be that UK interest rates go to 5%. Potentially even higher than that, should inflationary pressures not show significant signs of easing.

This means that while some developed market peers might be able to hold conversations regarding potentially lowering rates over the coming months, it appears that the absolute earliest as it stands that the BoE might discuss interest rate cuts is the second half of 2024.

Questions do need to be asked of UK policymakers as to why the approach towards tackling inflation has been so conservative. It is not like no one saw the inflation headwinds coming.

External headwinds

At the same time, questions can also be asked why it is that the UK economy is so sensitive to external headwinds.

When the pandemic hit, the UK economy was hit the most out of advanced nations. When inflation arrived, the UK is once again facing the largest brunt of the impact.

If there is one positive that can be taken from the latest Bank of England meeting it is the announcement that the UK economy can avoid a recession. This would allow the Monetary Policy Committee to take some more risks and consider adjusting its stance towards raising rates at a faster pace in response to the prolonged battle taking place with rising inflation.

Annualised inflation coming in slightly below expectations at 4.9% compared to the 5.0% forecast, might raise some hope that while this data does not spell out that Fed officials may consider that lower interest rates are returning, the economic release also does not imply that the Fed needs to raise rates higher either.

The initial reaction was softness in the Greenback. This is likely due to the admittance that while this data might not tell us enough about what the Fed is thinking, it at least provides some indication that the Fed will not be pushed to raise interest rates even higher in a hurry.

Gold benefits most

The main asset to benefit is once again Gold, which punched its way back towards previous record highs.

The move in Gold is particularly inspired by the way in which buyers were able to defend the previous psychological resistance at $2000 as support during recent sessions. This provided a pat on the back to Gold enthusiasts that the 12% rally year-to-date still has potential fuel in the tank to continue driving further.

Overall, anyone hoping that this economic release will provide guidance on the future outlook of US interest rates will have had their hopes dashed.

Similarly to the monthly employment report released at the end of last week, Wednesday’s inflation headline allows the Fed to continue to bide its time and wait for clarity from future economic data releases over the coming months.

 

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