While the Bank of England (BoE) raised rates for the second consecutive month by 0.25 points as expected, the decision was much more finely balanced than expected with four MPC members voting for a larger 0.50 rate hike. With most G10 central banks either hiking or shifting to a more hawkish stance (ECB), the scope for GBP strength is limited, in the view of economists at MUFG Bank.

UK rate market had moved to price in too many rate hikes

“The updated inflation forecasts showed that inflation is set to fall sharply below target to 1.6% in three years time based on market rates. The inflation forecasts were based on market rates showing the policy rate rising up towards 1.4% in 2023. We believe the sharp undershoot of inflation relative to target in 3yrs time will help contain rates and limit the potential for GBP strength.”

“We do not envisage GBP breaking sustainably to the upside on the back of this MPC announcement. Any gain from the current spot rate toward the 1.4000 level versus the US dollar is unlikely to be sustained while the increased hawkishness of the ECB with high anticipation ahead of the ECB meeting on 10th March means a low in EUR/GBP just below 0.8300 may now have been established for the coming months.”