Governor Bailey sounding hawkish might support Sterling temporarily – Commerbank

The Bank of England (BoE) is convening for its regular rate meeting today. Economists at Commerzbank analyze Sterling’s outlook ahead of the Interest Rate Decision.

BoE continues to face tough decisions

The core inflation rate remains well above 5% after all, which means that compared with other G10 countries the UK has one of the highest core rates. And at 7% wage growth remains well above the inflation target – despite the larger-than-expected fall in October.

For that reason, it is likely to be inconvenient for the BoE that the market is already pricing in first rate cuts for June. Due to high wage growth, inflation risks are likely to be higher than in the US. That means for Sterling everything hinges on whether Governor Andrew Bailey will be able to convince the market that the BoE continues to take decisive action against inflation.

The high core rate is likely to serve as a good reason and he is therefore likely to be more successful at sounding hawkish. That might support Sterling temporarily. On the other hand, quite a lot has already been priced into Sterling which is likely to limit the upside potential.