The European Central Bank and the Bank of England are likely to adopt “similar” stances on monetary policy going forward, although the BoE is expected to adopt a slightly more hawkish approach, according to analysts at UBS.
In a note to clients, analysts added that the economic situation in the two regions is “rather similar, with a slight tilt toward strength in the latter and weakness in the former.”
For these reasons, they expect the euro/sterling pair to trade “slightly weaker” but to remain stable near its current range of £0.83 to £0.85. Volatility in the pair “will remain subdued,” they added.
The comments come after the Bank of England left its benchmark interest rate unchanged at 5.0% last week, with officials stressing their desire to take a gradual approach to potential future policy easing after a rate cut in August.
The decision had been widely expected by economists, especially after UK consumer price growth hit 2.2% year-on-year last month, close to the bank’s medium-term target, but inflation in the services sector was high at 5.6% year-on-year. Service price gains are a key data point for the BoE.
The prospect of rising service price inflation in the UK has led many forecasters to bet that the Bank of England will move more slowly than its peers in cutting interest rates.
Other indicators of price pressures were mixed. Wage growth, another key measure watched by the Bank of England, slowed and the broader economy remained stagnant in July.
Meanwhile, the European Central Bank earlier in September cut borrowing costs for the second time in three months.
The European Central Bank’s interest-rate-setting Governing Council said it had cut the deposit facility rate — the mechanism through which the ECB guides monetary policy — by 25 basis points to 3.5%. In July, the ECB left its benchmark deposit rate unchanged at 3.75%, after cutting it from an all-time high of 4% in June.
Since that meeting, headline inflation in the euro zone has slowed to a two-year low of 2.2%.
But European Central Bank President Christine Lagarde stressed at a press conference following the decision that the central bank was not “committed” to a particular interest rate path and would remain data-driven before making any future policy moves.