Committee (MPC) voted by margin of 7-2 to raise the bank rate by 25-basis points. This pushed the UK interest rate up to 0.50%, from historic lows. It was also the first time in 10 years that the Bank of England moved to raise interest rates.
This is a significant decision which has far-reaching implications for the UK economy, and currencies that trade against the sterling. When interest rates rise, speculators and currency traders tend to purchase that currency, given that it becomes inherently more attractive than competing currencies. Unfortunately for the GBP, conventional theory has not held true.
CAD Jumps as BoE Raises Rates
The AUD and the CAD both spiked against the GBP in trading sessions earlier in November. Unfortunately for sterling, the Bank of England statement to the effect that the currency markets had already priced in the interest rate hike and possible future rate hikes softened any growth prospects for the GBP. The statement issued by Mark Carney – BOE governor – had a negative effect on the currency.
Carney failed to mention the need to increase interest rates at a rapid pace. The BOE cited tightness in labour markets as the reason for the recent rate hike, yet scant mention was made of this or possible future rate hikes after the 25-basis point movement in November. Recently, inflation figures for October were released, and they also surprised markets. The UK’s CPI inflation remained unchanged at 3%, the same as the September reading. This dampens expectations of future rate hikes by the BOE and it’s MPC, and downgrades any growth prospects for GBP bulls.
For currency traders, it’s all about future projection. According to Olsson Capitaltrading expert Kyle Courtney, ‘…the lack of guidance on additional rate hikes is deeply concerning. As a GBP trader, you take your cues from BOE governor Mark Carney, and it’s not only what he says that matters – it’s what he omits from statements that speculators are looking at.’
Where to next for the GBP and the CAD?
Canadian traders seeking to go long on sterling will be looking carefully at the Bank of England governor and any talk of additional rate hikes in 2018. For now, it doesn’t appear likely that the Bank of England will act. The current interest rate in the UK is 0.50%, and this is 0.50% lower than the bank rate in Canada. Recall that in October 2017, the BOC retained its interest rate at 1%.
For 2017, the Bank of Canada has already raised rates twice, in July and in September. Provided no additional rate hikes take place, neither the loonie nor the GBP will benefit from Central bank activity. Leading up to the bank rate hike in Canada, the central bank indicated that the economy was heating up. Since then however it has cooled to a degree, tempering expectations of further rate hikes in Canada.
Based on the current economic realities in Canada, the monetary policy decision-making processes are deemed correct. The Canadian economy does not require monetary stimulus at this juncture; currency traders will be eyeing the Monetary Policy Report for indications of which way the CAD is likely to move against the USD, the GBP and the AUD. If expectations prove true, the economy will expand by 3.1% through 2017, and slow to 2.1% GDP growth next year.
Canada’s economic policies have tended towards protectionism, and with NAFTA in doubt, further contractions in overall economic growth could be on the cards. There is little urgency to hike the bank rate in Canada at this point in time, as that would cause a contraction in economic activity at a time where uncertainty is growing. At the time of writing, the CAD/USD pair was trading at 0.7825 up from 0.74 at the start of the year. The CAD/GBP pair is currently at 0.59364 with no noticeable appreciation in 2017.