Pound to Euro Rebound Attempt Fails as BoE, ECB Both Reject talk of Rate Cuts

December 15, 2023 - Written by James Fuller

STORY LINK Pound to Euro Rebound Attempt Fails as BoE, ECB Both Reject talk of Rate Cuts

The Bank of England (BoE) and ECB both met expectations on Thursday with no changes to interest rates and both pushed back against market expectations of lower interest rates anytime soon.

Given the recent shift in pricing, there was scope for a significant adjustment in market rate expectations which boosted the Pound and Euro on major crosses.

The Pound to Euro (GBP/EUR) exchange rate jumped to 1.1645 in immediate response to the BoE decision, but was unable to hold the gains and settled close to 1.1610.

Dynamics between all major central banks will remain a key element for currency moves.

The ECB held interest rates at 4.50% at the latest policy meeting which was in line with consensus forecasts.

According to the bank; “Underlying inflation has eased further. But domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs.”

It added; “Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal.

Bank President Lagarde stated that there had been no discussion of rate cuts at the meeting.

According to Lagarde; "Should we lower our guard? We asked ourselves that. No - we should absolutely not lower our guard."

According to ING; “Today’s ECB meeting marks the end of the current rate hike cycle and was the first tentative step towards more dovishness to come. After today’s meeting, however, it should also be clear that the end of a hiking cycle does not imminently lead to a cutting cycle.”

Seema Shah Chief Global Strategist at Principal Asset Management commented; “It [The ECB] will only signal rate cuts once it has sufficient confidence about the future path, likely only a meeting or two before it plans to ease policy. Even so, with a more concerning growth path ahead, the ECB is likely to cut rates ahead of the Fed, not after."

JP Morgan head of global FX strategy Samuel Zief commented; "The ECB continues to signal that rate hikes are done but their updated economic projections show no reason to hurry towards less restrictive policy.”

Earlier in the day, the Bank of England held interest rates at 5.25% with a 6-3 vote for the decision as three members again voted to increase rates by a further 25 basis points to 5.50%.

Governor Bailey commented; "We've come a long way this year and successive rate increases have helped bring inflation down from over 10% in January to 4.6% in October. But there is still some way to go."

In this context, he repeated that there was no case for an early cut in interest rates.

Katharine Neiss, chief European economist at PGIM Fixed Income, noted the hawkish statement, but the picture could change quickly.

She added; “That said, the statement does acknowledge inflation has come down, that monetary policy is ‘restrictive’ with slack in the economy opening up. Perhaps most notably, for one voting member, ‘the risks of overtightening policy had continued to build.’

According to Neiss; “That suggests that while the Bank of England may not yet be ready to pivot a la the Fed, it may be willing to do so sooner rather than later.”

According to ING; Unlike the Federal Reserve, the Bank of England is clearly reluctant to endorse market pricing for rate cuts in 2024. The Bank has reiterated that rates need to stay restrictive for quite some time, but markets are probably right to expect cuts by next summer.”

Melanie Baker, senior economist at Royal London Asset Management noted the importance of early 2024 data; “the February [BoE] Report will be accompanied by their annual “stocktake” of supply capacity so would probably be the more likely time to expect a bit of a shift in tone.”

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TAGS: Pound Euro Forecasts