Bank of England Raises Rates by 50-Basis Points in a 6-3 Vote

It was a big day for the GBP/USD, with the Bank of England following in the footsteps of the Federal Reserve, delivering its final monetary policy decision of the year.

On Wednesday, the Fed caught the markets by surprise, delivering a hawkish 50 basis point rate hike. The Fed not only upwardly revised its interest rate projections but also revised down growth forecasts.

This morning, the Bank of England matched the Fed’s 50 basis point rate hike, taking the interest rate to 3.5%. Ahead of today’s decision and forward guidance, the markets expected the Bank to announce a slower pace of interest rate hikes in 2023, supported by the view that inflation peaked in October.

The MPC vote count signaled a dovish rate hike, with two members voting for less than a 50-basis point hike.

According to the Monetary Policy Summary,

• The Monetary Policy Committee voted by a majority of 6-3 to increase Bank Rate by 0.5 percentage points to 3.5%.
• Two members voted in favor of keeping the Bank Rate at 3.0% while one member voted in favor of a 0.75 percentage points increase.
• The labor market remains tight and inflationary pressures in domestic prices and wages could persist, justifying a forceful monetary policy response.
• CPI inflation is expected to continue to fall gradually over the first quarter of 2023, as earlier increases in energy and other goods prices drop out.
• Bank staff expect the UK GDP to decline by 0.1% in 2022 Q4, 0.2 percentage points stronger than in the November Report.
• The Bank may need to raise rates further for a sustainable return of inflation to target.

GBP/USD Price Action

Ahead of the BoE Monetary Policy Committee decision, the GBP/USD slid to a pre-policy decision low of $1.22964, weighed by the hawkish overnight Fed.

However, the GBP/USD slid to a post-policy decision and current-day low of $1.22877 in response to the vote count and rate hike.

At the time of writing, the Pound was down 0.94% to $1.23071.

Up Next

It is a busy day ahead for the dollar. The weekly jobless claims, Philly Fed Manufacturing PMI, and retail sales figures will likely have the most influence.

Following the Fed’s interest rate decision on Wednesday, an unexpected spike in jobless claims, a slump in retail sales, and a deeper contraction in manufacturing sector activity would test appetite for the dollar.

With the FOMC blackout period over, FOMC member chatter will also need monitoring.