BoE interest rate decision analysis

August 2, 2018 10:01 AM

The Bank of England’s monetary policy committee has certainly surprised financial markets today by voting unanimously to raise interest rates to 0.75%, the highest level since the 2008 financial crisis. For those who may be wondering why the central bank has pulled the trigger despite growing Brexit-related uncertainty, the answer can be found in the subsequent, hawkish policy statement.

According to the BoE, the first quarter slowdown in economic growth was temporary, with growth momentum recovering during the second quarter of 2018. GDP growth was expected to expand 1.4% in 2018, with growth averaging 1.7% per year through 2020, while inflation was seen cooling to 2.2% next year. Although the Pound initially appreciated following the hawkish hike, comments from Mark Carney during his press conference sent the currency collapsing like a house of cards.

The Pound’s sharp decline could be based on investors acknowledging that today’s rate hike is a “one-and-done” move. With Brexit uncertainty, cooling inflationary pressures and global trade tensions likely to obstruct the central bank's efforts to raise interest rates, the Pound remains vulnerable to downside risks.

Regarding the technical picture, the British pound/U.S. dollar (GBP/USD) currency pair has crashed over 100 pips with prices trading around 1.3024 as of writing. A solid close below the 1.3000 level could inspire bears to challenge 1.2940.

About the Author

Lukman Otunuga is an FXTM research analyst