BoE lifts interest rates to highest since 2008

• MPC hiked by 25 bps hike as expected, in 7-2 vote
• More rate rises to come if inflation does not go down
• Pound shows modest positive response

Before today’s Bank of England interest rate decision, traders had started to re-price a 25-basis point rate hike, after last week’s debacle in the banking sector triggered a coordinated central bank response, which eased those concerns. While fears over financial stability risks have not eased completely, traders knew that the BoE had the option to use targeted measures to address those risks like it did during the mini-budget crisis of last year and can use more traditional measures (changing the Bank Rate) to continue its fight against inflation. So, investors were pretty confident that a rate hike was forthcoming today.

Lo and behold, the BoE decided to hike interest rates by 25 basis points, lifting the Bank Rate to 4.25%, as had been widely expected.

How did the pound and FTSE react to the BoE’s decision?

Well, as we had indicated previously, a 25-basis point rate hike was mostly priced in, especially in light of the latest inflation data that was released on Wednesday and the corresponding positive reaction in the pound.

So, in terms of the immediate reaction, the pound edged up only slightly, while the FTSE also slipped a few points, before rebounding again.

However, it was never just the rate decision itself that was going to impact sterling. The split of the votes was always going to count, as too would the language the BoE used in terms of forward guidance.

In this regard, the split was 7-2, with Tenreyro and Dhingra voted to keep rates unchanged. The fact that they were not joined by other members meant that, on balance, this was slightly hawkish, than some would have expected just last week.

But after that hot inflation report we saw on Wednesday, there was no major shocks in the market, like the BoE’s last meeting in February, when the pound plunged after the central bank hinted it would pause rate hikes soon.

Instead, the BoE’s decision has surprised absolutely not many people. It is also hardly surprising that the BoE has repeated the phrase that "if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required." In terms of the banking sector, the BoE has stated that the FPC’s assessment is that UK banking system is “resilient.”

BoE’s rate decision concludes a busy week for GBP/USD

Ahead of the Bank of England’s rate decision, the GBP/USD had been on the rise, helped by both the pound finding strength and the US dollar weakening across the board.

The cable hit its best level since early February, after an unexpected acceleration in UK CPI to 10.4% cemented expectations over a 25-basis point BoE rate hike. Oher pound crosses rose across the board. Sterling had also held its own better than some of the other currencies impacted by the troubles in the banking sector thanks to the perception that the UK’s financial services are better insulated from the crisis.

The GBP/USD pair then found additional support from the Federal Reserve’ “dovish rate hike” on Wednesday. Traders sold the US dollar across the board after the Fed said it “anticipates that some additional policy firming may be appropriate,” omitting prior language forecasting “ongoing increases” in inters rates. However, the GBP/USD then came off its best levels along with other USD pairs after Powell dismissed market pricing of rate cuts this year.

The cable needs to break 1.2350 resistance if it wants to pave the way for 1.25 next. However, a drop below 1.2200 support first would be a bearish move.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R