Bank of England hikes Bank rate by 50 basis points after Consumer Price Index overshoot, but the markets aren’t convinced it will help

Ahead of the BoE (Bank of England) meeting last week, the UK consumer price inflation figures for May posted a big surprise, with the headline rate of inflation remaining at 8.7%, and the core rate, excluding volatile elements like food and energy, rising to 7.1%. The decision by the BoE on Thursday to hike interest rates by 50 basis points was not unanimous, with two members of the nine-strong committee voting for no change. The BoE decision came after the Federal Reserve decided to leave interest rates unchanged and the European Central Bank hiked by only 25 basis points. Is the BoE diverging from the other central banks, and does it mean anything for the FX markets? 

At the end of last week, the UK PMIs (Purchasing Managers' Indices) for manufacturing and services recorded drops in activity rates in both sectors, but that was in keeping with the general trend in Western PMIs, with the Euroland and US readings also dropping back generally. Over the weekend though was another curveball for financial markets, with a short-lived mutiny by the Wagner group in Russia, after it was alleged that the Russian military had targeted the group while in Ukraine. This hasn’t affected the financial markets, but it introduces more uncertainty regarding the economic and political outlook for the global economy. 

This week is a relatively quiet week in terms of data and events. In Euroland we have already had a weaker set of German IFO* business climate numbers for June, following in the footsteps of the weakness in the PMIs last week. 

Later in the week, UK consumer borrowing and M4 money supply figures for May are then followed by final Q1 GDP (Gross Domestic Product) figures. In the US, consumer confidence figures and more housing market data are the main areas of interest, alongside its final Q1 GDP release, and finally in Euroland the focus will be on Italian, German, Spanish, and finally the Euroland CPI (Consumer Price Inflation) figures. 

*Information and Forschung / Germany’s Institute for Economic Research

USD shows some new signs of strength, will it continue this week in a slow news week?

The US dollar has recovered a little further over the course of last week, but not necessarily against the likes of the EUR or GBP. Where the US dollar has gained most is against the likes of the Japanese yen and Chinese renminbi, with the dollar reaching 7-month highs against both. 

The Russian rouble also shed around 3% after the weekend's events and the Turkish lira continues to decline. Will the US dollar continue to make gains, and what will this mean for current trading rates against the likes of the euro and UK pound? 

I don’t think that there will be much direct movement caused by this week’s economic data and news, but the risks of a push higher in the US dollar most likely outweigh another sell off, in my opinion. The next big event in the markets is the US non-farm payrolls data, due a week on Friday. What will that data reveal in terms of the next moves for markets? 

Central bank spotlight shines heavily on the developed/developing dichotomy

Last week saw most central banks act as expected, but there were a couple of notable exceptions. The Norges Bank hiked by more than was expected (50 basis points versus the 25 basis-points consensus forecast), and then the Turkish Central Bank hiked interest rates from 8.5% to 15%, when a move to 20% was expected. Neither of these moves made much difference to the FX markets, and there is the risk of more tightening to come from both. 

As for this week, the Swedish Riksbank is set to hike interest rates again, while the central bank of Colombia is expected to leave interest rates on hold. Is there a risk of a bigger hike from Sweden? The financial markets don’t appear to think so, so any upside for the Swedish krone appears highly limited, in my view. 

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in The Netherlands, authorised and supervised by De Nederlandsche Bank, the European Central Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, The Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, The Netherlands. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.

scroll to top