"After last week’s transformational budget, it was a given that the Bank of England would be compelled to review its stance on interest rates, with a view to accelerating hikes."
The Governor of the Bank of England said that it is monitoring developments in financial markets very closely in light of the significant repricing of financial assets".
However, he stopped short of announcing an emergency rate rise, stating that the MPC will "make a full assessment at its next scheduled meeting of the impact on demand and inflation from the Government’s announcements, and the fall in sterling, and act accordingly".
Commenting on the statement, George Lagarias, chief economist at Mazars, said: “After last week’s transformational budget, it was a given that the Bank of England would be compelled to review its stance on interest rates, with a view to accelerating hikes. The budget in and by itself, for all its expansive nature, may not necessarily stoke long-term inflation. Inflation is still driven by externalities, such as energy prices and global supply chain dislocations. A global growth crunch may further suppress demand. However, it is the market’s response that troubles policy makers. The heavy borrowing that will probably be required to support British consumers has taken a significant toll on the Pound. In the early hours of Monday, the two-day losses versus the Dollar were surpassing 1992 when George Soros ‘broke’ the Bank of England.
"Since the beginning of the year, Sterling has lost over 20% versus the Dollar. Most major commodities trade in Dollars, forcing, in essence, the UK to import American inflation. While central banks seldom accept that they would intervene to support their currencies, currency weakness is inherently inflationary for economies with trade deficits. We believe it is natural for the Bank of England to seek a more hawkish path and would not be surprised if this is announced at the next meeting.”
