The Bank of England (BOE) is one of the two major central banks presenting its monetary policy decision today. Here are four reasons why today’s decision might be bullish for the British pound.
The two major central banks in Europe are ready to present their monetary policy decisions today. Market participants expect the BOE to raise the interest rate further by another 25 basis points after the surprise rate hike delivered in December.
How will the British pound react to today’s decision? Here are four reasons to buy the pound:
- Rate hikes are bullish for the currency
- The inflation rate is well above the BOE’s target
- BOE is well ahead of other central banks in this tightening cycle
- Omicron unlikely to derail the UK economic recovery
Rate hikes are bullish for the currency
The market participants expect the BOE to deliver another rate hike today, following the one from last December. Rate hikes are bullish for the local currency, especially since other central banks lag in the cycle.
After the last December’s hike, the GBP/USD rose from 1.33 area to 1.37 – once again, rate hikes are attractive to the currency.
The inflation rate is well above the BOE’s target
The BOE has a mandate of price stability, and its definition for it is to keep inflation to the target. However, inflation is at 5.4% currently, and the target is 2%.
Hence, the BOE should hike even more aggressively, thus reinforcing the previous argument. That would be even more hawkish if the BOE explicitly signals today another hike in March or May this year.
BOE is well ahead of other central banks in this tightening cycle
Other central banks in the developed world are not where the BOE is in this tightening cycle. For instance, the Reserve Bank in Australia, the European Central Bank, or even the Federal Reserve, have not lifted their rates from the pandemic lows.
Omicron unlikely to derail the UK economic recovery
The omicron variant is now the dominant one in most of the world as the COVID-19 pandemic moves forward. However, after the initial fears, it turns out that the economies remained open as the pressure on the health systems is manageable. Hence, Omicron is unlikely to derail the UK economic recovery, another positive for the British pound.
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