By Craig Erlam
The Bank of England accelerated its tightening efforts after meeting this week, hiking rates by 0.5% in response to another raft of worrying inflation data.
And it’s not just Wednesday’s CPI data that will have caused considerable discomfort for the MPC; the April figures were also far too high and wage numbers we’ve had in the interim suggest its becoming increasingly embedded. That had to have caused serious alarm within the BoE, within seven members of the committee anyway.
Two policymakers voted to hold rates steady for the fourth meeting, highlighting the widening gulf between the views on the MPC which may make finding a consensus going forward that much more challenging.
There’s every chance that those backing 50 basis points did so in the hope that doing more now may necessitate the need to do less later and for a shorter period of time. That’s not how markets are initially perceiving it though, with the odds of Bank Rate rising above 6% increasing. It could get rather painful in inflation doesn’t improve soon.
The pound appears to be weighing up both of these considerations, as is evident in the very volatile response we’ve seen in the currency.
Rate hikes are generally good for a currency, but when they’re rising to levels that could seriously threaten the economy, there’s certainly an argument for the opposite to happen.
Turkish rates finally in right direction
Another interest rate decision was announced alongside the BoE, with the CBRT reverting back to hiking interest rates aggressively in order to put a lid on inflation and steady the Turkish currency which has fallen another 15% in recent weeks.
President Erdogan won the election promising to defend lower interest rates, having led a campaign of aggressive rate cuts under Governor Şahap Kavcıoğlu, before immediately replacing him and the finance minister after the vote.
A rate hike on Thursday was widely expected, but the range of forecasts was vast and if anything, the 6.5% hike was at the lower end of the range.
Turkey faces many problems going forward as a result of the misguided policies over the last couple of years and that will likely warrant more aggressive tightening in the future.
For now, investors may be mildly relieved that rates are heading in the right direction, if not fast enough. The risk is that Erdogan hasn’t really hesitated to sack Governors that raise rates in the past so investors will never feel fully at ease as long as he’s President.
Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.
