FX.co ★ Bank of England raises interest rates, but maintains bond purchase program

Pound rallied on Thursday after the Bank of England said they will raise interest rates in November. They will do so to contain inflation, which is projected to exceed 4% amid rising energy prices.

Several events played a key role in reinforcing the desire of committee members to act more aggressively. In a statement from the Monetary Policy Committee (MPC), the central bank said they believe that any tightening should start with an interest rate hike, even if that looks impractical since the bond purchase program will not be completed until the end of this year. Two of the nine MPC members pushed for an early end to all purchases, with Dave Ramsden voting no for the first time in four years.

There were talks after the meeting over how the central bank can implement a rate hike while maintaining the quantitative easing program. Many view the move as preposterous because if money continues to flow like a river, it will be very difficult to fight against a fairly high inflation. In any case, there will be another MPC meeting on November 4.

There is no doubt though that the Bank of England needs to work very hard to contain inflation. Just last month, it jumped to 3.2%, which is beyond the target value. Fortunately, current support measures can now be curtailed since according to the latest data, the labor market has improved greatly, especially in terms of job growth.

Analysts forecast inflation to exceed 4% in the last three reporting months due to growing energy prices. The rise in gas prices, which has caused turmoil in the UK energy markets, will pose a significant risk to inflation growth. MPC noted that consumer price growth could even double the target until the second quarter of 2022.

But despite all the prerequisites for a tighter landing of the British economy, only two representatives of the Bank of England voted to cut the bond purchase program. Deputy Governor Dave Ramsden joined Michael Saunders in voting to reduce the target for government bond purchases from £ 875 billion to £ 840 billion. The other seven members voted to keep the existing program.

As for the interest rate, MPC members unanimously left it unchanged at 0.10%, but cut the growth forecast for the third quarter of 2021 by 1%.

With regards to macro statistics, the IHS Markit reported that composite PMI in the UK grew at the slowest pace in September, mainly due to shortage of materials and labor, which constrained business activity and increased inflationary pressures. The index fell to 54.1 points, from 54.8 points last month.

Going back to GBP/USD, a lot depends on 1.3650 because climbing above it will provoke a further rise to 1.3696, 1.3760, 1.3840 and 1.3910. But if the bears manage to push the pair below the level, price will plunge to 1.3615.