Brown Brothers Harriman’s (BBH) Elias Haddad notes that United Kingdom (UK) inflation remains persistently above target, limiting the Bank of England’s (BoE) ability to ignore the energy shock. However, he argues current BoE rate hike expectations are excessive given estimated economic slack. Following the March Consumer Price Index (CPI) release, he expects GBP/USD to remain confined to a 1.3400–1.3700 range in the near term.
BOE pricing seen as too aggressive
“Persistently above target UK inflation leaves the BoE with little room to look through the energy shock. In line with consensus, headline inflation quickened to 3.3% y/y vs. 3.0% in February on higher prices for motor fuels. Core inflation (excluding energy, food, alcohol and tobacco) unexpectedly slowed to 3.1% y/y (consensus: 3.2%) vs. 3.2% in February and services inflation rose to 4.5% y/y (consensus: 4.3%) vs. 4.3% in February.”
“The UK swaps curve adjusted higher following the CPI report to imply greater odds of nearly 50bps of rate hikes over the next twelve months.BoE rate hike bets are still too rich in our view given excess slack in the economy.”
“The BoE estimates a negative output gap of -1% of GDP in 2026.”
“GBP/USD will likely trade within a 1.3400 and 1.3700 range in the near term.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
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