HSBC: BoE Talk

From the FXWW Chatroom: BoE rate hikes are being discussed by both the MPC and the markets – but we do not think a hike would be GBP positive
* In a cyclical world, rate hikes are currency supportive…
* …but in the structural and political world that GBP inhabits, we believe rate hikes could be damaging
There is a clear divide within the Bank of England. Concerns over rising inflation have exposed a hawkish and a dovish camp. This has opened the door to the possibility that the BoE could hike rates in the near future. Indeed Governor Carney’s very recent hawkish comments have added an extra notch to the debate. By explicitly stating that “some removal of monetary stimulus is likely to become necessary” this indicates a rate hike is not just possible, but might even be probable. We believe it would be a mistake to hike rates in the UK at this juncture and do not believe a rate hike will cause a sustained rally in sterling.
We continue to believe that GBP is headed to 1.20 against the USD and to parity against the EUR by year-end. The last thing the UK needs in our view is an unnecessary rate rise being added to the already difficult economic and political outlook.
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