After deliberating at its September meeting, the Bank of England (BoE) determined that the current stance of monetary policy was acceptable. Despite the ‘modest tightening’ of regulation that the BOE had predicted for their horizon in August, some events during the interim period seem to have reinforced that argument, although some uncertainties remain, according to the most recent statement.
According to the minutes, all MPC representatives “consented that any potential preliminary restriction of fiscal policy should be put in place by an increase in Bank Rate, even if such consolidation became suitable before the end of the current UK government bond equity investment scheme”. “We have decided to move our rate hike prediction scheduling to end-2022 from mid-2023 to reflect this key change.”
GBP/JPY Rises on Hawkish BoE
The Bank of England convened last week, and it was the line in the minutes on the possibility of interest rate hikes that triggered the sharp increase in the value of the pound. Several changes during the interim time seem to have bolstered that case (for raising interest rates), albeit there are still several concerns. Following the Bank of England’s minutes, it was evident that the central bank was concerned about rising inflation.
The Bank of England was particularly concerned about rising natural gas prices. A major area of focus should be this particular statement- “The MPC’s mandate is clear in that the target rate remains at all times, underscoring the centrality of stable prices in the UK fiscal policy.” Following the report, the currency markets factored in a 15 basis point rate increase in March, putting the rate hike ahead from June of next year.
With the Bank of Japan projected to maintain interest rates at their present low levels, the Japanese Yen is expected to stay weak. The rise in 10-year US Treasury yields provides another justification for the JPY’s decline. If the Federal Reserve is likely to be more hawkish in the future, this should further strengthen the USDJPY’s upside potential while also weakening the JPY.
The major risk is that the Evergrande situation flares up again, which could result in a slight strengthening of the Japanese yen. The likelihood of this becoming a very serious situation is viewed as minimal, with even Powell lending his support to the reassurances. Nonetheless, the risk remains a risk, and the possibility of a huge corporation imploding should not be dismissed out of hand. The other danger is a downturn in the economy in the United Kingdom, which would undermine the Bank of England’s forecast for faster rate hikes.