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There are dovish rate hikes and hawkish ones.
While the U.S. Federal Reserve embarks on a tightening cycle that projects as many as 11 quarter-point increases, the Bank of England is sounding more cautious, even as it’s made three rate increases this year compared to just one at the Fed.
Bank of America strategists Kamal Sharma and Myria Kyriacou say the Bank of England is increasing rates for the wrong reasons. They noted a “tinge of regret” in the latest decision, writing U.K. rate hikes may not necessarily be constructive for the pound. The Bank of England downgraded the language associated with future rate increases to “might” be needed from “likely.”
“With the [monetary policy committee] sounding almost apologetic about hiking once again, this serves to underscore to us the position of weakness the BoE finds itself: hiking due to supply shocks (one of which – Brexit – it still does not acknowledge) and against the backdrop of a generational squeeze in personal incomes,” they said.
The Bank of America analysts said they were puzzled with the pound’s resilience during the Ukraine crisis, particularly against the euro. They say that’s because the large share of energy stocks means the U.K. market
UKX,
remains the favorite equity market exposure in Europe, “but how resilient that narrative is against the backdrop of slowing growth remains to be seen.”
The pound
GBPEUR,
has gained 1% against the euro and dropped
GBPUSD,
2% vs. the dollar this year.
