• richard evans

BoE raises rates 50bps but warns of recession

Good morning

Apologies for the late report this morning. VirginMedia fully to blame, when I first logged I had no internet and quick service status check with VM confirmed there was an outage. They initially said it would be fixed by 4pm, so I guess I should be happy that I’m here at 9.15 or so with it back up and running.

So the Bank of England did indeed raise rates 50bps, the largest one-off rise since 1995 I believe. GBPUSD back then was around 1.6000 for the record. Anyway with inflation forecast to rise to 13% in Q4 2022 BoE did see fit to act more forcefully than they have done previously. Only one member, Tenreyro, voted for a smaller 25bps rise. BoE see inflation back at 2% by Q3 2024 if rates move up to 3% by mid-2023.

Further rate rises are on the table, perhaps not 50bps but we’ll likely see a string of 25bps rises in the coming months. Whether or not we reach 3% remains to be seen. Oddly, BoE forecast inflation would move below 2% by Q4 2024 even if rates were held at current levels. That’s only one more quarter than if they raise rates. If their aim is to bring inflation down, I’d argue therefore that further rate rises may be limited.

BoE forecasts suggest the economy will shrink towards the end of 2022 and continue shrinking through 2023, which would be the longest recession since 2008. So with a recession looming and rate rises potentially less than forecast, it is no surprise that GBP fell from its pre-announcement level around 1.2190 to 1.2065. Perhaps more surprising is that it has clawed its way back up to 1.2145, where we trade now, which is not far from levels seen this time yesterdays.

The 1.2100 GBPUSD put I looked at yesterday is still very much live, although we may have to wait until the US employment numbers this afternoon to see how USD reacts. A headline of +250k is forecast. A weaker reading will support the idea that hawkish expectations for the Fed are overdone, a stronger reading will likely reinforce recent comments from Fed officials that they are far from finished in this rate cycle.

Should mention oil prices, which have been falling recently, Brent crude is now $94.50, WTI is just below $89.00, lowest levels for six months or so. Just watch how quickly the prices of fuel drops at the petrol stations!

This will be the last report for a couple of weeks, as I head off on Sunday for a much needed holiday with the family. Off to the Greek island of Kos, where temperatures seem to sit in the mid 30’s. Mind you, looking at the forecast for the next couple of weeks, its not going to be far behind that here. Still, nothing like going away.

Just for the records, current levels in various selected currencies are: GBPUSD 1.2145, EURUSD 1.0225, GBPEUR 1.1870, USDJPY 132.95, GBPJPY 161.40, GBPAUD 1.7465, Gold $1787, USDCAD 1.2885. Be interesting to see where they are when I get back. Feel free to send in your predictions….

Have a great couple of weeks……

- 12.15 BoEs Pill speaks

- 13.30 US nonfarm payrolls

- 13.30 CAD unemployment

- 15.00 CAD Ivey PMI

- 20.30 CFTC position data

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