Interest Rate hike – Will they or won’t they?

By Matthew Vassallo

GBP exchange rates face the prospect of increased volatility over the coming weeks, as investors try to plot its potential path in the run up to Christmas.

Whilst the Pound has found a level of support against its Euro counterpart following last week’s downturn, any bounce back to last month’s near two-year highs may well be dependent on the global markets’ ability to navigate the current economic uncertainty brought about by the new Covid (Omicron) variant.

This new strain, discovered recently by doctors in Africa, has set alarm bells ringing due to its high contagion rate and has threatened to push back the UK economic recovery. The UK was already having to contend with slower than expected economic growth and spiralling inflation figures, which are set to reach 5% by the spring according to the Bank of England’s current forecasts.

This current wave of uncertainty has caused the global markets to once again contract, with the CBI already downgrading its growth forecast for the UK to 5.1% for 2022.

This downturn in global market confidence has led to an increase in demand for what are historically considered more stable assets, such as 10-year bonds, whilst safer haven currencies such as the CHF & USD have also seen their value increase of late. The USD in particular, has been buoyed by this current malaise in global economic growth and as such we’ve witnessed a marked increase in its value against GBP, but in particular the EUR.

The greenback is trading near a decade high against the single currency and with German factory orders tumbling 6.9%, the Eurozone’s lynchpin is showing ominous signs of increasing stress fractures, within its usually reliable economic model.

With inflation numbers predicted to spiral behind 5% during the first two quarters of next year, as the pending increase in energy caps push up the cost of living, there has been a widespread expectation that the BoE would have to react accordingly by raising UK interest rates.

This wide-ranging viewpoint was clearly not shared by members of the Central Bank, who made a clear decision not to raise rates at their penultimate policy meeting of the year in November.

With the final meeting of 2021 taking place next Thursday, the markets focus will once again fix firmly on this date, with the potential outcome likely to dominate much of the economic headlines over the proceeding days.

Whilst a rate hike is almost a given during Q1 of 2022, BoE members would have to break an unequivocal trend of never raising the UK’s base rate in December. When we also consider their current rhetoric, which has vocally talked down the prospect of a rate rise this month due to concerns over the ongoing impact of Omicron, we may once again be left waiting for the their decisive move until at least early next year.