The GBP/EUR exchange rate gained strength again yesterday reaching 1.1700 level after the Bank of England maintained stimulus levels and warned of 4% inflation this winter. The Pound had fallen in the lead up to the Bank's Monetary Policy Committee as investors expected the bank to strike a more cautious tone in light of slowing economic growth and the energy crisis that the UK is now facing.
The bank opted to keep interest rates on hold at 0.1% and maintained its existing quantitative easing policy bond-buying at £895bn. However, two policymakers, Dave Ramsden and Michael Saunders, voted against. They wanted to stop the QE program early, by reducing the amount of UK bond buying from £875bn to £840bn.
The Bank now expects the economy to grow at a slower pace than previously forecast and stated that the increase in gas prices is an ‘upside risk’ to its inflation projections, which were set in August and predicted 4% inflation. The Monetary Policy Committee also warned that inflation could remain above the 4% level into the second quarter of next year, which would intensify the squeeze on UK households after recent tax hikes.
The Bank of England are holding off for now on making any changes for now as they wait to see the impact of the end of the furlough scheme on the UK economy. Following the announcement, the market is expecting an interest hike in February 2022 which could have a big effect on the pound. A hike, or one bigger than predicted, would likely see the pound rise vs the Euro and Dollar. On the other hand, no action in February could weaken the pound substantially as this would indicate a lack of faith in the potential of the UK economy as it tries to stabilise post covid pandemic.
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