The Bank of England decided today to hold UK interest rates at 0.75%, following a meeting made by the Bank’s Monetary Policy Committee (MPC).
Investors were scrambling to sell off the GBP before the decision was made, causing it to drop below 1.30 to 1.29770. But immediately after the vote came in at 7 for and 2 against to maintain the current rate, the Pound spiked to a high of 1.31096 against the USD.
This movement was influenced by the vote of confidence in the UK economy, represented by both a strong majority in the vote, as well as Governor Mark Carney’s subsequent statements. Carney expressed optimism in the UK economy, despite Brexit drawing ever closer.
It is possible that Carney wants to portray a strong vote of confidence for the economy from the Bank as he prepares to hand over the role to his successor Andrew Bailey. However, this could also end up posing a problem for Bailey, as economists speculate that the recent drop in oil prices could cause the Bank of England to miss its 1% inflation target.
This decision comes as somewhat of a surprise, considering recent global and domestic developments, and the fact that the MPC has been split on rates since November. These factors caused a strong prediction for the Bank to lower the rate, resulting in the initial drop.
While the rate has been voted to remain unchanged, the MPC said that they were ready to cut rates if necessary, stating that they would be closely monitoring whether or not an improvement in business sentiment regarding Brexit would lead to economic growth.
Our head of FX and Metals here at BlackBull Markets, Anish Lal had this to say about the GBP:
“The Pound following a range bound start to 2020 experienced it's most volatile trading session thus far. Traders were left in the dark prior to the Bank of England interest rate decision, with a 45% chance of a rate cut from the current 0.75% base rate amid a potential economic slowdown post Brexit, and this initial panic caused the GBP/USD to move and reject a key area of support at the 1.2970 mark. Following a sharp rejection of this area, the news release shortly after revealed a confident rate hold, with MPC members voting 7-2, perhaps a hawkish surprise for investors, with Governor Mark Carney seeming calm and citing a stable economic environment.”
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Sources: The Guardian