abrdn: Downside risks to sterling increased

abrdn: Downside risks to sterling increased

November 3, 2022

Central bank British Pound
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Below, Luke Bartholomew, Economist at abrdn, comments on the Bank of England's interest rate decision.

The Bank of England hiked rates today, but signalled it is very uncomfortable with how high markets are currently expecting rates to rise.

Some aspects of the Bank’s forecasts are rather less informative than usual, given the uncertainty over fiscal policy in general, and energy policy in particular. However, the overall message is clear. The Bank thinks that if it were to deliver a rate hiking cycle in line with current expectations of investors, this would lead to a prolonged and deep downturn.

So, the Bank’s hope is that by hiking more today and in the near future, it will ultimately need to deliver less hikes. This is a tricky message to communicate, and it remains to be seen how open markets are to it given the recent period of volatility and the Bank’s track-record of underestimating how much tightening it ultimately delivers.

But with the Fed signalling last night that it will push rates even higher than it had expected, the downside risks for sterling have increased.

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