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The Bank of England decision poses downside risks to the pound says an analyst we follow.
Francesco Pesole, FX Strategist at ING, says in a daily note the Bank of England was presented with another round of "hawkish repricing" as investors ramped up expectations for interest rate rises in the coming months.
UK bond yields across the spectrum rose as investors saw increasing inflationary risks that must be met with higher central bank interest rates.
Money market prices show some 80 basis points of hikes are now expected from the Bank, which equates to a little more than three 25 basis point moves.
"We think this is excessive," says Pesole.
The European Central Bank is also anticipated to raise rates by approximately 80bp during the year, but the ING analyst points out the ECB’s starting point is 150bp lower, "and policymakers in Frankfurt have been more hawkish than their BoE counterparts."
Taken together, the odds of one delivering 80bp of hikes are higher than those of the other; in this case, the Bank of England is unlikely to meet expectations.
"Today's BoE rate announcement could therefore prompt some dovish repricing in the curve and lift EUR/GBP as the ECB’s tone could instead keep tightening expectations relatively firmer in the EUR curve," says Pesole.
ING expects an 8-1 vote split in favour of a hold, with Chief Economist Huw Pill voting for a hike.
"However, we don’t expect the Bank to add fresh clues about policy direction. The outside chance on the hawkish side is that Greene and Mann also vote for a hike, and on the dovish side that Governor Bailey pushes back against aggressive pricing," says Pesole.
The initial, and perhaps the most important, signal from the Bank drops at midday when we see how the Monetary Policy Committee voted: the split is in itself an important hint on which way the Committee is leaning, as it shows where the momentum in thinking is shifting.
The surprises will come on the dissent: how many veer away from the majority vote to hold rates would signal some momentum towards a June rate rise.
However, a solid majority vote for a hold would signal the Bank is clearly not on board with bets for three hikes this year. That would deflate the pound.