EUR/GBP trades higher around 0.8650 ahead of BoE-ECB policy decision

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The EUR/GBP pair trades slightly higher to near 0.8652 during the late Asian trading session on Thursday. The pair edges up as the Pound Sterling (GBP) underperforms ahead of the monetary policy announcement by the Bank of England (BoE) at 12:00 GMT.

EUR/GBP edges up to near 0.8652 ahead of the monetary policy announcement by the BoE and the ECB.
Both the ECB and the BoE are expected to leave interest rates unchanged.
The BoE is anticipated to retain its gradual monetary easing guidance.

The BoE is expected to leave interest rates unchanged at 3.75%, with a 7-2 majority, as it reduced borrowing rates in its last meeting, and guided that the monetary policy will remain on a “gradual downward path”. Therefore, investors will pay close attention to the monetary policy statement and Governor Andrew Bailey’s press conference to get fresh cues on the interest rate outlook.

The United Kingdom (UK) central bank is expected to reiterate gradual monetary easing as employment conditions have remained weak and officials have been confident that price pressures would return to the 2% in the second quarter this year. However, the Consumer Price Index (CPI) accelerated in December after cooling down in October and November.

Meanwhile, the Euro (EUR) trades broadly stable ahead of the European Central Bank’s (ECB) interest rate decision at 13:15 GMT. The ECB is also expected to leave borrowing rates steady, as various officials have expressed that monetary adjustments are inappropriate unless there is a dramatic change in inflation and employment.

On Wednesday, the Eurozone’s preliminary Harmonized Index of Consumer Prices (HICP) data for January cooled down to 1.7% on an annualized basis, as expected, from 1.9% in December.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.