The BoE seems to be chasing inflation developments rather than fighting them, damaging Sterling – Commerzbank

The BoE surprised yesterday and hiked its key rate from 4.50% to 5%. Interestingly enough Sterling was unable to benefit from the surprise decision. Economists at Commerzbank discuss GBP outlook.

BoE unable to convince

A central bank that is fighting decidedly against stubbornly high inflation levels would sound different. Instead, the BoE refers to its inflation projections. That means it still expects that inflation will fall notably over the course of the year. It has been expecting that for some time and at least the rise in core inflation paints a different picture.

So the impression remains of a central bank that was too slow in starting to hike its key rate and moved to smaller rate steps too early, even signalling a possible pause. The BoE seems to be chasing inflation developments rather than fighting them with an active monetary policy, which is damaging for Sterling. As we do not believe that the BoE will suddenly take a different approach, we remain sceptical for Sterling.