Concerns about the strength of the British pound have played a role in the Bank of England's cautious approach to interest rate cuts compared to the U.S. Federal Reserve. However, recent actions by Japan to sell dollars and stabilize the yen could unexpectedly provide some breathing room for the Bank of England.
The Bank of England is set to announce its latest policy decision on Thursday. While no immediate rate changes are expected, there's speculation about whether the Bank may hint at a potential rate cut in the near future, possibly as soon as next month. This speculation has been fueled by more dovish statements from senior Bank of England officials, indicating a possible shift in stance. Meanwhile, the Federal Reserve in the U.S. remains firm on keeping rates relatively high for an extended period.
Currently, the likelihood of an ECB rate cut next month is high, but the probability of a rate cut by the Bank of England in June is less certain. Market projections suggest that the first rate cut by the Federal Reserve may not occur until November. This cautious approach by the Bank of England could be influenced by concerns about the impact of a weaker pound on import costs and inflation.
However, recent intervention by the Japanese government to sell dollars and stabilize the yen may alleviate some of these concerns. Similar actions by Japan in the past have resulted in a decrease in the value of the U.S. dollar against other currencies, including the pound. This, combined with potential factors like U.S. disinflation and a rebound in China, could ease pressure on the dollar and provide the Bank of England with more flexibility in its monetary policy decisions.
Analysts at Morgan Stanley suggest that even a moderate depreciation of the pound in response to a rate cut by the Bank of England would be manageable, given current market conditions. Similarly, Deutsche Bank analysts highlight the reduced sensitivity of sterling to interest rate differentials compared to pre-pandemic levels, suggesting that a potential rate cut by the Bank of England may have a smaller impact on the currency.
Barclays also anticipates that the Bank of England will maintain its current policy stance for now but may provide guidance hinting at a possible rate cut in June.
In summary, while Japanese intervention in currency markets may not be directly on the minds of Bank of England policymakers, it could indirectly influence their decision-making by potentially stabilizing the pound amidst global currency fluctuations.
Paraphrasing text from "Reuters" all rights reserved by the original author.
