Bank of England Makes Surprise Rate Hike

December 2021 BoE Monthly Bank Rate

Earlier today, the Bank of England made a surprise hike in its bank rate of 0.15% to establish a new higher rate of 0.25%. This was the first rate hike by the Bank in three and a half years, and comes after a sustained period of historically extremely low rates and an asset purchase program. The rate hike was agreed upon by an 8 to 1 vote of the Banks monetary policy committee and was therefore nearly unanimous.

The Bank‘s decision to raise its bank rate was not expected despite yesterday’s increase in the British CPI (inflation) rate to a ten-year high of 5.1%, overshooting the 4.8% annualized rate of increased that the market had been widely expecting. It is worth noting that the inflation rate in the UK remains considerably lower than what is being seen in the US and in other countries, and that a rate hike of 0.15% is somewhat smaller than the traditional minimum increment of 0.25% which is normally the smallest hike seen. The Bank seems to recognise well the fact that inflation is not reaching historically excessive levels and is also cognisant of the short-term threat of the dramatic spread of coronavirus seen the previous day when a record high number of confirmed daily cases was reported. Even if the government does not order a lockdown, unless the omicron variant has a dramatically lower morbidity, the rate of infection is likely to cause economic disruption. It is also true that the UK is seeing weaker economic growth than the USA.

The fact remains that while the Bank of England does not want to stifle economic growth, it does have an inflation target of only 2%, which is being far exceeded.

Federal Reserve Background

The Bank of England‘s rate hike also comes against the backdrop of yesterday’ FOMC policy statement, in which the US Federal Reserve resolved to double the pace of the winding down of tapering so it will fully end in March 2022 and signalled that it expects to implement three rate hikes over the remainder of that calendar year. These moves were widely expected but would have slightly increased pressure on the Bank of England to make a more hawkish tilt today, although it would have been far from the main consideration of the Bank. The fact that the European Central Bank and the Swiss National Bank left their interest rates unchanged in their policy releases earlier today would have decreased pressure, probably balancing out the equation.

Market Reaction to the Bank of Englands Rate Hike

As soon as the rate hike was announced, the relative value of the British pound rose, but not by an extraordinary amount. It is worth noting that the pound had already been trading in a bullish pattern for several hours prior to the release.

Since the rate hike a couple of hours ago, the GBP/USD currency pair is up by 0.60%, the EUR/GBP currency cross is unchanged, and the GBP/JPY currency cross is up by 0.49%. The major British stock market index, the FTSE 100, has fallen by 0.29%.

These price movements are not large by any means, but they do show that the relative value of the pound has risen against risk-off safe-haven currencies since the rate hike.

What Does This Mean for Traders？

Traders can consider taking a more bullish bias on the British pound. This could be expressed by looking to day trade GBP/USD or GBP/JPY in a long direction tomorrow, as the price has roughly completed its average true range for today, by buying on dips on short time frames. Longer-term traders might instead seek to slowly build a position by adding more if the GBP/USD continues to go up, or alternatively to wait for a breakout beyond the nearest key resistance level at $1.3414 or a retest of the former resistance level which may now have become support at $1.3310.

On a more cautionary note, it should be noted that the price movement we are seeing the British pound right now is far from exceptional.