The BoE Financial Stability Report Delivers More Policy Uncertainty

Following a busy morning for the GBP/USD, the Bank of England Financial Stability Report was in focus in the late morning.

With the Bank of England releasing the Financial Stability Report (FSR) on a twice-annual basis and the monetary policy decision on Thursday, there was more interest in the FSR.

According to the December 2022 Report,

• The UK growth and unemployment outlook has deteriorated since the July FSR.
• Prices have continued to increase, with food and energy prices behind the pickup in inflationary pressure.
• The BoE and other central banks have responded to the upward trend in price pressures by increasing interest rates.
• Rising rates and the expectation of more have driven up borrowing costs for households and businesses.
• As a result, households may find it more difficult to repay debts, though low unemployment means that people are in a better position to manage the current period of stress.
• Since the reopening of the economy, businesses have reported increased earnings and falling debt. However, higher costs, lower demand, rising interest rates, and ongoing supply chain disruptions could adversely affect earnings for some businesses and their ability to finance debt.

While the tone of the Financial Stability Report was similar to that of the July Report, the BoE view that households are in a better position to cope with the current period of stress should provide comfort.

The Financial Stability Report Paints a Marginal Improvement on July

In the July Financial Stability Report, the Bank of England noted that the economic outlook for the UK and the rest of the world had deteriorated materially. The BoE had also highlighted that energy and food prices were rising sharply. Price pressures forced the BoE to raise interest rates to slow the pace of price increases.

The July report pointed out that weaker growth and tighter financial conditions would make it harder for households and businesses to repay or refinance debt. In July, the BoE expected households and businesses to become more stretched and vulnerable to shocks.

Today’s report suggested little incentive for the Bank of England to hike rates more aggressively.

At the last Bank of England Monetary Policy Committee meeting, the Bank forecasted that the UK economy would contract in five out of six quarters if the Bank stands pat on interest rates. The Bank also warned the UK is facing its longest recession since records began. The warning came after the Bank lifted interest rates by 75 basis points to 3% in November.

GBP/USD Price Action

At the time of writing, the Pound was up 0.10% to $1.22837. The GBP/USD rose to a morning high of $1.23035 before sliding to a post-UK employment report low of $1.22485.

In response to the FSR, the GBP/USD rose to a high of $1.22938 before easing back. UK Claimant Count figures for November and the Bank of England’s hope of a low unemployment environment to help weather the current economic crisis could become stretched should employment conditions worsen, and food and energy prices continue to rise.

Next Up

It is a big day for the Greenback, with the November US CPI report in the spotlight. The market bets are for the Fed to hike interest rates by 50 basis points. A hotter-than-expected inflation number could deliver uncertainty ahead of tomorrow’s decision.

While Fed Chair Powell talked about the Fed taking its foot off the gas, Powell did not provide a timeline. The US Jobs Report, Service Sector PMI numbers, and inflation figures continue to support a hawkish stance. The stats leave the CPI Report to decide on Wednesday’s policy move and forward guidance.

No FOMC members will speak today. The Fed entered the blackout period on Sunday, December 3.