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Pound Sterling slumped against the Euro, Dollar and other major currencies after the Bank of England said it had ended its interest rate hiking cycle, believing that inflation would fall sharply over the coming months.
Meanwhile, The Bank's communication revealed there was little appetite to raise interest rates again, inviting markets to speculate it would cut interest rates far sooner than anticipated.
We said in our pre-Bank of England report that a decision to hold interest rates that was accompanied by no commitment to further hikes would represent the most bearish scenario for the Pound.
"A less hawkish BoE risks accelerating the depreciation of sterling, a factor that could lead to upward price pressures at a time when oil prices have risen and pay increases are still very strong," warns Oliver Blackbourn, Multi-Asset Portfolio Manager at Janus Henderson.
Indeed, this has come to pass: the Pound to Euro exchange rate gapped lower to 1.1513 on the developments with the Pound to Dollar exchange rate lurching to 1.2249.
The Bank of England did not even try to fight back against the market bringing forward rate cut expectations, something the Federal Reserve has so successfully managed to do via its policy of skipping hikes but indicating it is not yet done.
The Bank of England, on the other hand, has all but declared victory on inflation and in doing so has sent a clear message that the next move is a cut.
This belief could prove premature given the elevated nature of UK inflation and the tight labour market but underlines how this is an instinctively 'dovish' central bank. For the Pound, this only spells weakness.
The Bank attempted to convince markets that it would hold interest rates at elevated rates for a prolonged period, saying "monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit."
"As per the Fed and ECB, it’s very much less of a case of how high and as how long – the decision to pause today confirms that the BoE is falling in line with peers – the emphasis now is on duration not the absolute level," says Neil Wilson, Chief Market Analyst at Finalto.
But the market reaction shows investors don't believe this and place more emphasis on the Bank's prediction that "CPI inflation is expected to fall significantly further in the near term," seeing this as confirmation it will cut at the first opportunity.
Currency markets had bought Sterling through the course of 2023 as the Bank raised interest rates and boosted the yield on UK bonds relative to elsewhere, bestowing the currency a 'carry advantage'.
But this advantage will rapidly fade as investors believe rate cuts are looming, in turn weighing on the Pound.
Above: The month-long selloff in Sterling accelerated on the Bank's 'dovish' decision to hold rates.
"From these minutes, it’s not possible to confidently predict the outcome of the MPC’s final two meetings this year, given the marginal vote split this month and the Committee’s deliberate attempts to keep its options open. But with surveys pointing to a further increase in labour market slack, a slight slowdown in wage growth and lower CPI inflation by year-end, the case for hiking again likely won’t be stronger in November or December than today," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.
The ending of the rate hike cycle could ultimately boost the UK's economic prospects, particularly if the Bank is right and inflation will return to the 2.0% target over the next three years.
With Bank Rate now residing below where markets had expected for much of the past year, financial conditions in the UK will prove easier and more supportive of households and businesses than had been expected.
In short, this is supportive of the economy. If the currency market increasingly rewards economic outperformance, as some analysts we follow are now saying, this could support the Pound over the medium term.
For now, though, data is surprising to the downside and it will take some time before any positive surprises come through, meaning there is further scope for Sterling weakness.
Andrew Bailey addresses broadcasters post-decision. Still courtesy of Bloomberg.
The September BoE decision was not followed by a press conference, but Bailey nevertheless felt he should speak to the press.
He appeared keen to push back against any prospect of rate cuts in the near future, something that could help explain the Pound's recovery from its earlier lows.
"We have not had any discussion on the Monetary Policy Committee about reducing rates because that would be very, very premature," he told a pool of broadcasters.
"We can’t be complacent about this... our job is to get inflation back down to the 2% target and to sustain it there. So the job isn’t done yet," he added.