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BoE’s Pill says should not give impression that hike now would be the start of a series of increases
Bank of England (BoE) Chief Economist Huw Pill, who has voted for a quarter-point interest rate hike in recent months, said on Thursday that we should not give impression that a hike now would be the start of a series of increases.
On Wednesday, Pill stated that he was more sceptical about market pricing of four increases to borrowing costs by the BoE over the next year.
Key quotes
Should not give impression that a hike now would be the start of a series of increases
BoE’s Pill tempers rate hike expectations, limiting GBP upside
The drop in the FXS Speechtracker score to 3/10 from a historic 6.4/10 signals a clear dovish shift in tone from Bank of England Chief Economist Pill. By stressing that a hike now should not be seen as the start of a series of increases, Pill effectively pushes back against expectations of a sustained tightening cycle, capping immediate GBP support.
This remark suggests the Bank of England is more focused on managing market expectations than on launching an aggressive policy path, which softens the perceived policy trajectory. For FX, the message reduces the appeal of GBP versus the Dollar and Euro, as investors may see any potential hike as a one-off adjustment rather than the beginning of a new bullish rate trend.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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