Pound stutters as debate on BoE rate hike path heats up

Investing.com -- The pound was largely unchanged against the dollar Wednesday, as the debate continued on how far the Bank of England needs to go to bring inflation under control, with some calling for just two more hikes, while others warning of several more hikes.  

GBP/USD fell 0.07% to $1.2702.

“We continue to see two more hikes rather than the five priced which will remove some of the current yield support for the pound,” MUFG said, downplaying expectations that BoE still has a ways to go to end its rate-hike cycle.

The U.K overnight index swap (OIS) pricing in a further 130 basis points of tightening priced through to the turn of the year “remains excessive,” MUFG adds, and is likely to adjust lower as the markets see “inflation come down.”

Falling food prices are likely to have the “biggest impact” on short-term inflation expectations followed by a 17% drop in utility bills from the government’s price cap on energy that came into force on July 1.

Others, however, aren’t so sure. JPMorgan sees the risk that the BoE could hike rates to 7% from the current 5% amid concerns that the BoE will struggle to bring inflation back to its 2% target.

Despite the 18-month rate-hike cycle delivered by the BoE, consumers are benefitting from a rise in normal wages that has softened the blow from higher mortgage rates, it added.  

As the BoE faces an uphill challenge to curb inflation, the central bank may be forced to turn more aggressive on rate hikes, pushing the economy into recession.

“A break in behavior, or hard landing, looks increasingly likely at some point over the next year if inflation is to be brought under control in the UK,” JPMorgan said, according to a Bloomberg report.

The growing debate on the BoE’s path of rate hikes comes just weeks after the U.K. central bank delivered a surprise 0.5% hike following data that showed inflation was running hotter than expected.

At the annual central bank meeting in Sintra, Portugal last week, however, BoE governor Andrew Bailey was tight-lipped when discussing market expectations for several further rate hikes.

"The market…thinks we're nearly done at the moment. They've got a number of further increases priced in for us," Bailey said, "My response to that would be: 'Well, we'll see.'"