Pound Facing Mid-Atlantic As Markets Focus On BoE
Declining prices of natural gas may have given a boost to the euro zone economy, but the UK did not see any of it, which goes to show just how strange the British downturn has become.
Moreover, it also added pressure on the Bank of England (BoE). On Tuesday, business surveys all over the globe for the month of January were also published.
They showed an expansion in the euro zone business activity for the first time since June because of a winter that has been unusually warm, thereby bringing down the sky-high prices of natural gas in the last six weeks.
Even though the wholesale energy prices in Britain had also experienced a similar easing, there was a contraction in the UK industry this month.
As a matter of fact, the stark contrast showed because the industry shrank at its quickest past in the last two years.
The blame was put on pretty much everything, from serial labor strikes, worker shortages, and rising interest rates to inflation and the mounting damage of Brexit.
On Tuesday, the Sterling experienced its biggest drop against the euro in a single day in more than a month.
Even if surveys can be considered wayward every now and then, the manufacturers of the Confederation of British Industry also showed data that supported the message.
The order books show further weakening in January even though cost pressures have eased a bit. No matter what the reason behind this continuous gloom may be, it puts the BoE in a tough spot.
This is because the British central bank is still trying to control inflation that continues to be in the double digits and has to boost growth in the private sector.
Most importantly, it has to accomplish these goals without driving the economy, which has become very sensitive, further into the mire.
The Bank of England (BoE) is scheduled for a meeting in the next week and there are increasing calls for it to put an end to its monetary policy tightening that has been ongoing for over a year now.
In December 2021, the policy rate of the BoE stood at 0.1% and has now risen to 3.5%. But, most analysts believe that the bank has absolutely no intention of slowing down right now.
Most economists believe that the central bank will deliver another interest rate hike of 50 basis points in the next week, which will push up the rate to 4%.
Moreover, another interest rate hike has also been forecast after this one, but of 25 basis points, which will push up the rate to 4.25%.
The pricing in the financial markets has been even more aggressive. Markets indicate that the interest rate will climb to 4.5% before the BoE decides to stop this summer.
But, there is no predicting the state of the economy by then. However, there are rumors of disagreements over the hiking cycle within the policymaking council of the central bank.
Therefore, there is a possibility that the tightening could stop earlier than expected.