The Bank Of England Chose To Pause For Effect

The Bank Of England Chose To Pause For Effect
Paul Allison, CFA

2 months ago2 mins

What’s going on here?

The Bank of England (BoE) decided not to hike interest rates on Thursday.

What does this mean?

The European Central Bank and the Federal Reserve (the Fed) had recently signaled that they’d take a breather from rate hikes. At the time, the BoE seemed to be pushing in the other direction, gearing up to be the solo rate-hiker. But Wednesday’s surprisingly tepid UK inflation data seems to have taken the sting out of those plans: the BoE kept rates at 5.25%, ending a run of 14 consecutive hikes. Now, though, the central bank will be joining its international colleagues in the economic outlook waiting room, where it’ll bite its nails and nervously scan for any fresh data that could dictate its next move.

BoE holds rates

Why should I care?

Zooming out: Sterling’s slip ‘n slide.

The BoE’s swift one-eighty demonstrates just how quickly economic tides can turn. Spare a thought, too, for foreign exchange traders and deal-seeking vacationers alike, as countries’ shifting economic outlooks have been pulling global currencies in each and every direction. Britain’s sterling has been particularly yo-yo-esque in recent times, and the combination of that cooler-than-expected inflation data and the BoE’s rate pause has already seen the currency hit the skids. Keep that up, and whispers of parity – essentially an equal level with the US dollar – could spark again.

Source: Google Finance

The bigger picture: Sticks and stones are useless.

The Fed proved that words matter on Wednesday, at least when it comes to interest rates. See, the central bank wants the country to save more and spend less, because that should help bring down rising prices. And by reminding everyone that it might raise rates again, the Fed encourages folk to borrow less and focus on their savings in preparation. So as if by magic (or an acute understanding of human psychology), the mere concept of rate hikes can bring about their intended outcome – possibly without actually needing to follow through.



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