BOE leaves bank rate unchanged at 3.75% in April meeting, as expected
The desk interprets the Bank of England's decision to maintain the bank rate at 3.75% as a prudent response to current economic conditions, particularly given the uncertainty surrounding energy prices and geopolitical tensions. Per the full note source, the BOE's cautious stance reflects a desire to monitor inflation developments before committing to further rate hikes, with current market pricing indicating a reduced likelihood of immediate increases. This aligns with our broader view of a cautious central bank amid a weakening economy, as evidenced by the shift in market expectations for rate hikes, now pegged at around 50% for June and 61 bps for the year-end. The upcoming economic data will be critical in shaping future monetary policy decisions.
What the desk is arguing
The desk posits that the BOE's decision to keep the bank rate unchanged at 3.75% is a reflection of a balanced approach to current economic challenges. Per the full note source, the central bank acknowledges the limitations of monetary policy in addressing global energy price fluctuations while remaining vigilant against potential second-round inflation effects.
Market expectations have shifted notably, with traders now pricing in only about 50% odds for a rate hike in June, down from approximately 70% prior to the meeting. This adjustment underscores the market's recognition of the BOE's cautious tone and the prevailing economic headwinds.
Where it sits in our coverage
Our consensus target for GBP/USD is 1.075, with a range from 1.04 to 1.12. Notably, jpmorgan is aligned with our view, targeting 1.10 for March 2026, while bofa holds a contrary position with a target of 1.04 for the same tenor.
This perspective aligns with the cautious sentiment expressed by the BOE, diverging from more aggressive rate hike expectations seen in some quarters. Our target sits comfortably within the lower end of the consensus range, reflecting a more conservative outlook on the currency pair.
How other firms see it
Firms such as citi and goldman share a similar cautious outlook, emphasizing the need for careful monitoring of inflation dynamics before further tightening. Conversely, deutsche and bofa advocate for a more aggressive approach, suggesting that immediate action may be warranted given inflationary pressures.
The trajectory of GBP/USD will likely mirror the BOE's rate path, while developments in energy prices and inflation indicators will be crucial in shaping market sentiment moving forward.
What the calendar says
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Prior 3.75% Bank rate vote 0-8-1 vs 0-8-1 expected (Pill voted to raise bank rate by 25 bps) Reasonable to hold bank rate at 3.75% given UK economic situation and Middle East uncertainty CPI likely to be higher this year as effect of higher energy prices passes through Our job is to make sure inflation gets back to 2% after initial impact of the war has passed There is a risk of material second-round effects from inflation Policy setting would need to lean against this Weaker economy, labour market, and tighter financial conditions will help reduce inflation over time Monetary policy cannot affect global energy prices, and should generally look through the initial impact on inflation Risk of second-round effects would depend partly on how long energy prices remained elevated Members broadly agreed that any second-round effects were likely to materialise more quickly via pricing channels than wage-setting While there were likely to be some second-round effects, continued weakness in activity would limit the strength of these Full statement It's nothing overly hawkish and if anything else, it's more of a realistic take by the BOE. One key line that I admire is the central bank outright stating that monetary policy cannot resolve what is happening with higher energy prices right now. And the only thing they can do is to respond to potential second-round effects.
In essence, the statement affirms that they should wait to see how inflation developments will change based on the Middle East situation. That is fair, although some policymakers would feel the need to take proactive action against the circumstances in play. And they also highlight that here: "Some members might prefer to act early as insurance against risks to inflation persistence.
Others might prefer to see more conclusive evidence of inflation persistence before acting. Such an approach might avoid unduly weighing on activity, or the risk of a subsequent policy reversal." If anything, I would applaud the communication here in being clear about everything. It is exactly the points that I raised in my post earlier this week here .
Overall, it's a balanced approach and a more prudent/cautious take by the BOE. No major hawkish tilt as they look to favour optionality more than rushing a decision. Coming into the meeting, traders were pricing in ~70% odds for a rate hike in June with the first full 25 bps rate hike priced for July.
As for the year, traders were pricing in ~70 bps of rate hikes by the time we get to the final December meeting. Now, we're seeing ~50% odds for a rate hike in June with July still pinned for the first full 25 bps rate hike. But by year-end, we're only seeing ~61 bps of rate hikes priced in.
Sources & References
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