The Bank of England had already seen the Fed’s and the ECB’s response to the banking crisis when it took its decision to hike by 25bps. The ECB hiked by 50bps and the Fed by 25bps as both central banks remain unfazed by the biggest banking crisis since the Global Financial Crisis of 2008. The Bank of England reflected this same confidence as it said that the Financial Policy Committee brief to the Monetary Policy Committee is that the UK banking system is resilient.

Inflation firms up but the BoE looks through the latest data

So, this banking resilience gave the BoE confidence to hike rates in the face of surprisingly high inflation. However, the Bank of England explained how the latest inflation data had taken the committee by surprise. February’s print shows the first increase in inflation in four months with the main pressure coming from the cost of food and non-alcoholic drinks.

It wasn’t just the headline that showed persistent inflation as the whole UK inflation set showed an aggregate beat exceeding economists’ maximum expectations. See here from Financial Source’s calendar:

The Bank of England’s Governor Bailey was also on the UK’s BBC Radio 4 on Friday, March 24 saying that rates will rise again if firms hike prices and ‘If all prices try to beat inflation we will get higher inflation’. So, the BoE is clearly concerned with these recent rises in inflation. However, the BoE statement says that CPI inflation is still expected to fall significantly in 2023 Q2 and at a lower rate than anticipated in the February Report. So, a mixed picture for UK inflation.

Growth revised higher

On a positive note, the second quarter GDP projections were revised higher to show a slight increase. This was a revision from the February report where Q2 GDP was expected to fall 0.4%. This will be welcome news for the UK and the GBP will be sensitive to good data. The GBP index sits in the middle of a range between 100 and 75 marked on the chart below.

The BoE’s latest decision should be broadly supportive for the GBP, but not in a clear tradable way. The UK will remain sensitive to incoming inflation data with big misses in expectations leaving the GBP vulnerable to short corrections lower.