The Bank of England is expected to raise interest rates by 25 basis points from 5% to 5.25%, a 15-year high, despite the declining inflation rates, as seen below. However, inflation is still way above the bank’s target of 2% forcing the BoE to continue its monetary tightening cycle. CPI in the United Kingdom in June 2023 came below expectations, declining to 7.9%, representing the lowest level since March 2022. Also, the core rate, which excludes volatile components, slowed to 6.9% from May's 31-year high of 7.1%.
Figure 1 UK Interest Rate (1990-2023)| Source: Trading Economics based on Bank of England
The central bank’s main dilemma is to stabilize prices while maintaining economic growth. However, during the UK’s current economic challenges, inflation becomes a priority. The British economy has been growing but at a slow pace during the past two years with the latest figure in Q1 of 2023 showing 0.1% growth QoQ, remaining stagnant from the prior quarter. However, the probability of a recession is still on the table.
The market is awaiting the Bank of England’s next decision. A higher-than-expected rate is usually positive for the country’s currency, and vice versa. When expectations are met, it gives investors confidence in the economy as they make their investing decisions.
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