The BoE’s stance seems too hesitant, which is likely to weigh on the Pound in the coming quarters, economists at Commerzbank report.
GBP weakness will probably continue next year as well
The door remains open for further rate hikes, but the BoE is likely to hope that the upcoming data releases will give it room to pause. The financial markets apparently do not share the BoE’s optimistic view. The terminal rate is now seen at 5.5%. This seems excessive in view of the BoE’s hesitant stance.
The market will probably have to scale back its interest rate expectations, which is why we are sticking to our forecast that the Pound will weaken against the EUR in the coming months. After all, in contrast to the BoE, the ECB appears much more determined in its statements, which should support the EUR.
GBP weakness will probably continue next year as well, as the BoE is likely to cut its key rate in view of the weak economy and somewhat lower inflation.
Source: Commerzbank Research
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On Monday, the Bank of England (BoE) signalled a more cautious approach when it came to continuing its campaign to weaken the Pound. The decision, announced at a meeting of the bank’s Monetary Policy Committee, saw the Pound weaken against the US Dollar for the sixth consecutive day.
The BoE has been at the forefront of a campaign to reduce the value of the Pound, which has been slowly depreciating since the Brexit referendum in June of 2016. The BoE has kept interest rates low and attempted to inject additional liquidity into the financial markets in order to increase the supply of money and lower the value of the currency. However, the BoE also indicated it would not move too quickly to further weaken the Pound, instead opting to wait for the UK’s Brexit negotiations to progress.
Analysts at Commerzbank have been critical of the BoE’s approach, suggesting that a more proactive stance towards devaluing the Pound would be more effective in helping to boost the UK’s economy. They pointed out that the Bank of England had been slow to act compared to other central banks such as the European Central Bank and the US Federal Reserve.
Commerzbank argued that the bank should be more aggressive in its monetary policy, implementing measures like quantitative easing, in order to which would weaken the Pound further and stimulate economic growth. However, the BoE may be hesitant to do so out of fear of triggering a further depreciation in the value of the Pound.
The decision by the BoE to take a more cautious approach to devaluing the Pound represents a divergence from the strategy laid out by Commerzbank. It remains to be seen whether this more cautious stance will ultimately prove successful in helping the UK’s economy, or whether a more aggressive policy is needed.
