We have an interesting week ahead with the Bank of England (BoE) policy decision this Thursday. In anticipation of the meeting the pound has fallen due to the uncertainty about a rate hike. Will The BoE raise interest rates in November or will they wait for more labour market data from the UK economy following the end of the furlough scheme? If they were to hike, The Bank of England could be one of the first major world banks to increase their interest rates.
Although investors are hopeful a rate rise of 0.15% is on the horizon there is still a risk and slight uncertainty that no change to rates could still occur. The recent fall in sterling suggests that investors are beginning to anticipate a delay in the rate hike, that a couple of weeks ago looked certain. This is due to the difference in opinions amongst the members of the Monetary Policy Committee and how urgently the BoE needs to respond to growing inflation pressures. With the UK labour market report out on the 10th November, some members may want to wait for the full suite of data following the end of the furlough scheme to see how this has affected the labour market.
Huw Dixon, the lead researcher for economic measurement at National Institute of Economic and Social Research summarised the predicament well: “If they do not raise interest rates at all, then their credibility in keeping inflation under control will probably be gone. If they raise rates too much, then asset prices may well fall, with the real possibility of a crash in house prices and the stock market. A difficult choice and moment of truth for the Bank of England.”
If all goes well and interest rates are increased this could make the pound more appealing and see the GBP/EUR rate push above 1.20 according to a strategy note complied for CME group. However, if there is no rate rise, and little indication of one in the near future, GBP could tumble.
Key upcoming dates & times:
UK Monetary Policy 4th November 2021
UK Labour Market Data 10th November 2021
