GBP Pulls Back as Only Saunders Sticks to Hawkish Agenda

Key Talking Points:

  • The Pound is coming off its daily highs as markets are disappointed with 7-1 vote amid expectations of 6-2
  • Saunders believes inflation will overshoot 2% for the next two or three years

The Bank of England has kept monetary policy unchanged as expected but a less hawkish tone than expected has left the Pound lacking a meaningful bounce. Market expectations going in to the meeting were for an unchanged policy with a hawkish tilt on tapering talks as inflation jumped to 2.5% in June with the bank expecting inflation to overshoot 3% for a temporary period. There was also talk of a 6-2 vote split to maintain the current asset purchases target but that turned out to be 71 as only Saunders decided to vote against.

The Bank of England said Saunders, who had previously been thought as one of the more hawkish members going into the meeting, wants to stop the current asset purchase programme as soon as practical after this meeting rather than continue until the end of the year as originally planned. He has also mentioned that he expects inflation to remain above 2% for two or three years ahead and therefore the bank should adapt its policy accordingly.

Bank of England Preview: How Will the Pound (GBP) React?

Ramsden, which was also thought to be one of the more hawkish members, finally decided to vote in favor of keeping the current programme as he judged that it was not sufficiently clear that the economy was on a path to meet the inflation target sustainably, given the remaining downside risks from covid.

Despite economic activity rebounding nicely, the delta variant had presented new uncertainties that were bringing down the odds of a policy change. The June retail sales data was slightly disappointing as many Britons were told to self-isolate for ten days after being pinged on the app, which saw consumer traffic reduced.

The shape of the yield curve is closely watched and especially now that sequencing has been thrown into the mix. The Bank of England has confirmed that the threshold to stop reinvesting the proceeds from gilts has been lowered to 0.5% from 1.5% whilst the threshold to start selling gilts has been lowered to 1%.

GBP/USD and EUR/GBP 5-minute chart

The reaction in the market was pretty subdued and more noticeable in EUR/GBP than GBP/USD given that the former has seen price pressure building for a while around 0.85 but unable to break lower.

— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin