Pound Will Find Support As Bank of England Hammers Home That Rates Will Stay 'Higher for Longer': Ebury

Image © Adobe Stock

The British Pound can find some support as the Bank of England "hammers home" the message it is too soon to cut interest rates.

The call comes from Ebury, the international payments and financial services provider, ahead of Thursday's much-anticipated interest rate decision and guidance update.

Markets are currently positioned for a first rate cut to be delivered as soon as May, judging that a rapid fall in inflation in April will prompt calls for an easing in monetary policy.

They suspect the February meeting offers the Bank a chance to signal that such a turn in direction is on the horizon, raising risks of a decline in the value of the Pound.

But Matthew Ryan, Head of Market Strategy at Ebury, says Thursday’s statement reiterates that further hikes are possible, even if this is not the Bank’s base case scenario.

Until now, the Bank of England has maintained guidance that "further tightening" would be required if inflation remains stickier than expected.

Economists agree it would signal a 'pivot' in policy towards a preference for rate cuts if the Bank decides to remove this line. But Ryan says February is too soon for such a development:

"We think that Thursday’s statement will again reiterate that further hikes are possible, even if this is not the bank’s base case scenario. It will be interesting to see whether the committee attempts to lay the platform for lower rates this week, perhaps by removing this reference from the statement."

Above: Markets have dramatically lowered expectations for the future level of Bank Rate, image courtesy of Nationwide.

Ebury expects another 6-3 split vote on rates on Thursday, with members Greene, Haskel and Mann to maintain their votes for an immediate hike.

Members of the Bank's Monetary Policy Committee (MPC) have tended to push back against market expectations for cuts in recent communications, and Ryan thinks Governor Bailey will likely stress that it remains ‘too soon’ to think about policy easing during the press conference.

"We expect the message to be hammered home that rates will need to stay ‘higher for longer’, which could provide some support for GBP," says Ryan.

The British Pound is the strongest performing G10 currency for the past month, courtesy of a gradual push back in expectations for rate cuts and ongoing supportive global market sentiment.

Analysts at Goldman Sachs say the Pound can likely continue to advance provided the global backdrop remains supportive, regardless of the scale of any pivot announced on Thursday.

"Sterling has benefited considerably from the global disinflation trend and shift toward policy easing," says Goldman Sachs, "GBP tends to do especially well in an environment of moderating rate volatility and rising equity prices."

As such, the global picture could be the ultimate determinant of how far the currency proceeds.