The Bank of England raised rates by 25 bp up to 0.75%, broadly in line with market consensus. Eight members out of nine voted in favor of the hike, one voted to leave the rate unchanged. Compared to the February meeting, officials’ opinions were divided much less hawkishly: at that time, four officials voted for a 50 bp rate hike. The conflict in Ukraine appears to have contributed to the BoE’s cautious stance, triggering an inflationary shock that is expected to hit consumer spending and begin to fade soon which suggests overly policy tightening is a real risk in this juncture. As at the previous meeting, the Central Bank said that a moderate tightening looks appropriate in the coming months, but pointed to the risks of the policy skewing in favor of a faster tightening, and vice versa a more cautious approach.It is interesting that despite the rather clear signals from the US and UK central banks that rates will rise for some time, investors consider sovereign debt quite attractive at current yield levels, not only long-term bonds, but also short-term bonds. On Friday, we see a decline in the yield of 2-year bonds of Germany, the UK and the US, the most significant decline in yields occurs in German bonds. This may be the first sign of market concern that central banks will be able to stick to their course of raising rates as a tipping point in the current trend of inflation may occur earlier than policymakers expect, which will put less pressure on them to continue with tightening cycle eventually leading to a dovish shift.Despite the more cautious stance of central banks, we also see a relentless inversion of the yield curves. An increase in short-term relative to long-term bond yields suggests that the value of cash-flows from long-term bonds relative to short-term ones is higher, which is often a part of expectations that economic upturn will soon alternate to slowdown or recession. Spreads between long and short Treasury bonds in the UK and in the US continue to decline and have already reached pre-pandemic lows:The pound was sold after the meeting of the Bank of England, although before the meeting there was buying in anticipation of a hawkish decision. The disagreements showed that the Central Bank is worried about the impact of the inflation shock on spending, so it is more cautious in tightening policy. And this is completely justified because the UK is an importer of energy resources and is more susceptible to the negative impact of events in Ukraine, like the EU. At the same time, inflation in the US is caused by growth in consumer demand, and the Fed, which is more confident in its course, will most likely be expressed in additional demand for the dollar. Against this background, the risk of a further decline in the GBP is growing, and the technical setup om the pair should also contribute to this:As part of the short-term and medium-term downtrends, the target for the pair may be the level of 1.29-1.2850.
Source: Tickmill