What a difference a new Prime Minister has made to the Bank of England! The Bank of England hiked rates by 75 bps to 3% last week in the biggest hike in over 30 years. However, the Bank of England signposted that it would be able to bring rates to a lower level than it had previously anticipated. This was reflected in Short Term Interest Rate markets on Friday of last week with the high rate now seen as 4.68% (down from 4.89%). That’s the good news for UK mortgage owners, but the bad news is this: the Bank of England is only able to tighten less because the fiscal pain is going to come from the UK’s budget on November 17.

After the meeting, Bank Of England’s Mann reminded markets that rates do not need to be as high as the market suggests. This could mean a high of 4.5% or perhaps 4.25% next year. Bank of England’s Baily said that rates lie closer to the constant rate curve than the market rate curve.

Inflation

The Bank of England’s projection for inflation was mainly lower due to the success of the Energy Price Guarantee. Inflation is now seen at 5.20% for Aug 2023. This is down from August’s forecast of 9.53%. In two years’ time, inflation is seen at 1.43% and this is down from August’s forecast of 2%. So, reassuring sounds from the BoE around inflation and hence in part why the BoE needs to do less.

The path for GDP has been revised lower longer out. So although near-term GDP for 2022 is now seen as 4.25% (vs 3.% prior) the longer-term 2024 GDP outlook is seen as -1% (vs -0.25% prior).

The bottom line

The BoE sees the need to do less, but that could be because a painful UK budget is on the way. So, this means that all eyes will be firmly on the November 17 budget, and in the meantime, the GBPUSD will likely be pressured lower as long as the Fed is seen as needing to maintain its hawkish stance.