“The MPC judges that the path for Bank Rate required to return inflation sustainably to target is shallower than that priced into financial markets” - BoE Governor Andrew Bailey.

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The Pound to Australian Dollar rate was hobbled and left at risk of further losses in the penultimate session of the week after the Bank of England (BoE) appeared to rule out the idea of indulging earlier derivative market pricing implying that Bank Rate could top five percent in the months ahead.

Sterling fell widely on Thursday including against the Australian Dollar after the Bank of England announced its largest increase in Bank Rate for decades but said financial markets are barking up the wrong tree when betting that borrowing costs could still rise substantially further up ahead.

Bank Rate was raised by three quarters of a percentage point to 3% in a Thursday decision that met economist and market expectations though the latter was evidently disappointed with the BoE’s latest economic forecasts and warnings about what they could mean for the interest rate outlook.

“The committee will not pursue a path that we think would drive inflation far below target. The MPC does not follow the market. It sets the level of Bank Rate to return inflation to the 2% target sustainably and in a way that avoids undesirable volatility in output,” Governor Andrew Bailey said.

“The central projections conditioned on the market implied path for Bank Rate serve as a reminder that we should not increase Bank Rate too far. The MPC judges that the path for Bank Rate required to return inflation sustainably to target is shallower than that priced into financial markets,” he added.

Above: Pound to Australian Dollar rate shown at hourly intervals alongside GBP/USD, GBP/CAD and GBP/NZD.

Governor Bailey reminded in Thursday’s press conference that earlier announced increases in Bank Rate and economic ailments like high energy price are likely already enough to drive inflation back to and then below the 2% target in the years ahead, from more than 10% in September.

While further increases in Bank Rate were not ruled out, the governor said that by raising it further the BoE would deepen an anticipated recession that is already expected to run for almost two years while ensuring a larger eventual undershoot of the inflation target.

“The majority of the Committee judges that, should the economy evolve broadly in line with the latest Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets,” the bank said itself in Thursday’s statement.

This will have come as a disappointment for interest rate derivative markets where prices have recently suggested that investors are expecting Bank Rate to rise near to 5% or more during the early months of next year, likely also explaining the widespread losses for Sterling on Thursday.

Disappointment for the market and upset for Sterling could grow further still, however, following the Autumn budget from HM Treasury on November 17.

Above: Pound to Australian Dollar rate shown at daily intervals with Fibonacci retracements of September recovery indicating possible areas of technical support for Sterling. Click image for closer inspection.

“The MPC’s forecast does not incorporate any further measures that may be announced in the Autumn Statement scheduled for 17 November,” the BoE said in Thursday’s decision statement.

November’s budget is expected to include plans for steep cuts to public spending and various tax increases that are intended to help the government pursue its goal of attaining a budget surplus, although each of these things will act as additional headwinds for GDP and dampen inflation.

In other words there is a likelihood of the BoE becoming even less comfortable with economist and market expectations for Bank Rate in the weeks ahead with further pushback against widely held assumptions and ‘market pricing’ possible in subsequent policy decisions.

This means risk of additional upset for Sterling that will complicate or perhaps even prevent the Pound to Australian Dollar exchange rate from building on its recent recovery from multi-year lows reached in late September.

“There are, however, considerable uncertainties around the outlook. The Committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully,” the BoE also warned.

Above: Pound to Australian Dollar rate shown at daily intervals with Fibonacci retracements of 2022 fall indicating possible areas of technical resistance to any further recovery. Click image for closer inspection.