Data leaves BoE questioning – To Hike or not to Hike?

By Matthew Boyle

Yesterday’s early morning release showing that UK wages grew 6.7% gave Sterling a boost and saw it gain half a cent against the Euro by the end of the day’s trading. This figure outstripped the previous year’s at 6.5% and was above what the markets had expected.

This reading is positive for the Pound as strong wage growth is consistent with extended periods of high inflation and encourages further rate hikes from the Bank of England. Whilst the BoE have stated they would be monitoring wage dynamics in relation to further hikes, they expect unemployment to increase throughout the year which will take some pressure off wages and inflation. Importantly it is this expectation that suggests we are nearing the end of the rate hike cycle we have seen. It is worth noting though whilst interest rates are currently sat at 4% most economists suggest that continuing inflationary pressures such as wage growth will see the BoE need to raise to 4.5% before ceasing, so say prepare one or two further hikes.

However, this morning’s inflation data might challenge this view as headline inflation has declined to 10.1% down from 10.5% and against an expected reading of 10.3%. The BoE will be pleased with this as of course slowing inflation is an indicator the previous rate hikes are having the desired effect and so makes it less likely for further hikes. Consequently, the gains made by the pound yesterday were almost instantly eroded following this news.

With today’s reading showing the inflationary scales could be balancing, the question now is will the Bank of England continue to raise rates or have we seen the end of the rate hike cycle? The strength of GBP rates of course hangs in the balance, so speak to your consultant at A Place in the Sun Currency today if you have any upcoming currency requirements.