Ben Broadbent, the monetary policy chief for The Bank of England has said that inflation is likely to soar above 5% in the first half of next year. With forecasts comfortably above the BoE’s 2% inflation target, it is expected that interest rates will be hiked early in 2022. Despite the positive sentiment, GBP has found little support amongst its piers, continuing its downward trend against USD and struggling to break out of the 1.17 channel against EUR. Broadbent has indicated the BoE believes this accelerated inflation in the cost of goods has come as a result of short-term global supply chain squeeze and is likely to reverse slightly into next year as conditions improve.
Some analysts and market makers are suffering from what could be coined interest rate “cold feet”. Market expectations have changed dramatically over the past 6 months, with forecasts placing a hike before the end of the year now being shunted towards the back end of Q1 2022. These continual shifts can create a “boy who cried wolf” scenario, producing a difficult landscape for GBP to find it’s much needed support. COVID-19 uncertainty is also playing a part – the rise of the new Omicron variant can put a dampener on economic policy change, with the UK Government needing fully understand the potential fallout prior to committing to a hike.
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Author: William Jones, Senior Relationship Manager.
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