BoE comments on rates send pound sterling higher vs. euro

Pound sterling up against euro as BoE officials say rates need to stay restrictive

On Thursday, the British pound saw a slight increase against the euro following statements from Bank of England (BoE) policymakers, including Chief Economist Huw Pill, stressing the need to maintain a restrictive policy stance for an extended period.

"We need a persistent level of restriction over the next extended period" Pill said.

Earlier this week, Pill had said market pricing indicating a potential interest rate cut in August 2024 "doesn't seem totally unreasonable". BoE Governor Andrew Bailey, however, had stressed on Wednesday that monetary policy would need to remain restrictive for an extended period.

“It’s too early to be talking about cutting rates,” Bailey said. Last week, the BoE kept the UK’s main interest rate at 5.25% and said rates would need to stay “higher for longer”.

The pound saw a 0.05% increase against the euro following the comments, reaching 87.12 pence, although it remained distant from Monday's three-week peak of 86.50.

Pound sterling also saw a 0.2% decrease against a strengthening U.S. dollar, settling at $1.2259 and retracting from Monday's nearly two-month high of $1.2428.

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Bank of England: Huw Pill’s comments stray from central bank narrative

In his morning notes on Thursday, Markets.com Chief Market Analyst Neil Wilson said Pill’s comments veered off the central bank’s “higher for longer” narrative:

“The Bank of England boss said it’s ‘too early’ to discuss rate cuts. All on pause and all on the Higher For Longer script. Only a couple of days ago his own chief economist, Huw Pill, said markets were about right to price in cuts in the middle of next year. Oops...but loose talk is par for the course.”

He added the central policy question for central banks — including the Bank of England — is how long to keep interest rates restrictive:

“The question is of course how long is ‘longer’ and do they tolerate higher inflation? I continue to believe CBs will be forced to accept higher inflation, but that doesn’t mean they are about to cut rates and allow inflation to take off again. They are rightly afraid of loosening prematurely just as they get something of a grip on inflation.”

GBP forecast: Pound sterling may weaken going forward

"Yesterday witnessed BoE Governor Bailey pour a degree of policy cold water on the previous assessment from Chief Economist Pill regarding market pricing for a BoE cut as early as August”, Jeremy Stretch, head of G10 FX strategy at CIBC, told Reuters of the latest BoE policy comments.

In his GBP forecast, Stretch said the British pound is expected to face a potential weakening trend against the euro, regressing to levels seen in October, and may retreat towards $1.2220 against the dollar. The projection is rooted in the upcoming UK GDP data scheduled for release on Friday, which could show consumers’ reluctance to spend amid moderation in the labor market. "We remain mindful of the risks of consumer fragility," he added.

According to LSEG data cited by Reuters, markets are currently pricing in about 10 basis points of BoE policy easing as early as May, and more rate cuts over the summer.

At the time of writing on Thursday, the euro to pound exchange rate stood at 0.872 GBP.

The pound to dollar rate — widely known as “cable” in forex markets — traded around $1.2263, with sterling having reversed its decline and gained close to 0.2% against the greenback on the day.

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