After a 50 bps rate hike in January, while we had some signs of lowering inflation and slower economic growth, some economists supported ending the rate hike cycle. However, Wednesday’s published inflation numbers changed the market sentiment, and now we have even some whispers about a 50 bps hike. The Bank of England’s (BoE) policy meeting is scheduled for Thursday, March 23, and we expect the UK central bank to deliver further tightening in monetary policy with a 25 bps rate hike. We also have other hawkish fans, who believe in a 25 bps interest rate increase to 4.25%, and repeat that in the next meeting, as inflation will stay at higher levels for longer.
After slower economic growth in 2022, January’s GDP rose a larger-than-forecast 0.3% month-over-month. Also, PMI surveys improved in February. Meanwhile, inflation is elevated, while the January CPI eased to 10.1% year-over-year, and the core CPI slowed to 5.8%; February data raised concerns and changed the market sentiment. February consumer inflation had an upside surprise, with the headline and core CPI unexpectedly quickening to 10.4% and 6.2% annually, respectively. On a monthly scale, CPI rose by 1.1% and Core CPI by 1.2%.
Ahead of the BoE meeting, we had two signs: inflation and the Fed meeting. With published data, we can now give more chances to hawkish fans. Furthermore, if Fed raises the rates by 25 bps later today, then for BoE, a 25 bps rate hike will be much easier, but for market participants, it will not be the main question anymore. If Fed raises the rate, which will be by more than a 95% chance, then the question will be about the time of pause and the target rates before the pause!
Market reaction at this condition will be based on the guidelines expressed in the statement and press conference. Our hawkish expectation tells us that UK Footsie still will be under pressure, and to have a brighter outlook; we need more time. About the GBPUSD, we must first wait and see the market reaction to the Fed announcement.