Sterling walking wounded, but UK stagflation almost off the table
Before we start with the headline and important EU news from today, MPC members caused a mini-crash in £ with comments on interest rates yesterday. Nearly 1% was wiped off GBP's value after markets slashed their bets for an incoming 75bp BoE rate hike. It was no shock to hear the comments from the panel, just the timing, which most analysts agreed was poor.
Reports that the new PM would cap energy costs at £2500, means the BoE have little need to hike interest rates aggressively, as inflation would immediately fall. Remember, interest rates have only risen this dramatically to curb red-hot inflation and now it looks like peak inflation is already behind us. The MPC could have waited to give this guidance during their meeting next week, but instead have waffled early and cost the Pound to fall after already being on shaky ground.
Onto Truss' confirmation of the £2500 price cap for 2-years and it's good news for consumers, businesses, the economy and £. It almost certainly takes stagflation off the table (a major thorn in recent GBP price) and staves off the prospect of any recession, let alone a forecast that suggested a year-long one. It paints a much needed brighter picture for Sterling long-term and aids in its short-term outlook too.
As expected, the ECB raised interest rates by a record 75bp to curb its tough inflation number and forecast. Little happened to rates until the minutes, where ECB President Lagarde provided more insight than last time for future meetings. "Today wasn't an isolated decision" the main headline, suggesting more aggressive hikes are coming especially after the latest Russian energy war talk.
The Pound has recovered around 0.5% from yesterday and may have faced it's bottom-out level after today's UK energy cap news.