EUR GBP Sinks After Central Bank Rate Hike

The EUR GBP exchange rate was 0.10% lower on Thursday as traders saw the Bank of England raising interest rates to 0.25%. The bank said they had to take action due to soaring inflation and price pressures. The ECB also had their interest rate meeting but decided to stay on hold at 0%.

The EUR v GBP was trading at 0.8510 after touching an intraday low at 0.8460.

Bank of England raises interest rates to 0.25%

The Bank of England has lifted its interest rate to 0.25% as inflation pressures rise in the UK.

The majority of analysts had expected the central bank to keep the interest rate at 0.1% due to the latest virus variant but policymakers said they “had to take action”.

Inflation was seen at the highest level since 2011, and the BoE decided to move and try to bring the country’s rising cost of living back under control. The bank has forecast that inflation was set to hit 6% in April, which is three times over the bank’s target.

Figures showed a larger than expected rise in inflation to 5.1% in November, and the bank said the decision not to increase rates last month was a close one.

Inflation has been rising globally due to higher energy prices and the lockdown-related supply-chain problems.

“The Committee continues to judge that there are two-sided risks around the inflation outlook in the medium term, but that some modest tightening of monetary policy over the forecast period is likely to be necessary to meet the 2% inflation target sustainably,” the BoE said.

European central bank stays stubborn

The European Central Bank has voted to leave its interest rates unchanged, saying it was “very unlikely” to raise rates at all next year, despite inflation soaring to record levels across the eurozone.

The bank said it will hold the benchmark rate at the historic low of 0%, with the pandemic emergency purchase programme set to end in March 2022.

Despite inflation across the eurozone reaching a record high of 4.9% in November, ECB board members have turned their attention to the coronavirus and the economic deterioration, particularly in Germany, Europe’s largest economy.

ECB president Christine Lagarde said on Thursday that it was very unlikely to raise rates at all next year, with consumer price rises expected to move to 3.2%, and inflation to then drop to 1.8% in 2023 and 2024.

“Inflation has risen sharply, owing to the surge in energy prices, and also because demand is outpacing constrained supply in some sectors,” she said.

“Inflation is expected to remain inflated in the near-term, but should ease in the course of next year. The inflation outlook has been revised up, but inflation is still projected to settle below our 2% target over the projection horizon.”

She also added that the ECB sees the economic recovery continuing, driven by robust domestic demand, and an improving labour market.

The ECB are staying stubborn as the US and UK central banks hike interest rates. That could come back to haunt them later.

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