The Bank of England announces its next rate decision on Thursday, and markets are overwhelmingly expecting a rise, the first in roughly three years. After a long stretch of holding rates and debating cuts, the conversation has flipped. For anyone paying overseas suppliers, staff or a property purchase, that shift matters, because interest rate expectations are one of the main forces behind the value of the pound.
The driver is an energy shock. Oil and fuel prices have stayed elevated on the back of the conflict in the Middle East, and that has fed into UK inflation, which has now moved above the Bank's own forecast. More worrying for policymakers, the pressure is not confined to petrol and diesel. Services inflation, core inflation and the prices firms charge at the factory gate have all firmed up, and the Bank's survey of businesses shows most firms planning to raise their own prices.
Governor Andrew Bailey has already warned that the case for a hike strengthens the longer energy prices stay high. That is the language of a central bank worried about second-round effects, where higher costs leak into wages and then into everyday prices.
A rate hike that is already priced in rarely moves the pound much on the day. The surprise, if there is one, comes from how the Bank talks about what happens next.
When a decision is this widely expected, the announcement itself is the least interesting part. What moves currencies is the detail around it. We would watch three things.
First, the vote split. If several members push for a larger move, markets will read that as a more aggressive Bank, and sterling could firm. A narrow majority with doubters would point the other way. Second, the language. Does the Bank describe this as a one-off response to an energy shock, or the start of a tightening cycle? Third, the new forecasts for inflation and growth, which will show how persistent the Bank believes the problem is. The Chief Economist's briefing the following day may then add colour.
There is also the question of relative policy. The ECB and the Federal Reserve have both recently held rates, so the Bank of England could look unusually hawkish by comparison. That would normally be supportive for sterling. But there is a trade-off. Higher rates also raise the cost of government borrowing and weigh on growth, and a market that starts to worry about the growth hit can quickly take back any gain. This is why we would not treat a hawkish Bank as a guaranteed boost for the pound.
Start with what falls due. List the euro, dollar and other currency payments you have to make over the next three to six months, with amounts and dates. Most businesses and individuals find that a surprising share of that exposure is already known.
If a stronger pound would help you, there is a reasonable argument for acting before the announcement removes some of the uncertainty, and a reasonable argument for protecting at least part of the exposure in case the reaction goes the other way. A forward contract lets you fix a rate today for a payment in the future, so the decision stops being a bet on Thursday.
For payments that are less urgent, a limit order lets you name the rate you want and be executed automatically if the market reaches it. That way you can benefit from any post-announcement strength without watching screens all day.
Do not wait for certainty. Fix a rate for the payments you cannot afford to get wrong, and set targets for the ones with flexibility.
Central bank weeks bring volatility, and volatility cuts both ways. If you have payments coming up and want to talk through your options before Thursday, speak to our team. We will look at your exposure, explain what is realistic, and help you put a plan in place.
Talk to our team about protecting your upcoming currency payments around the rate decision, with forward contracts, limit orders and rates your bank cannot match.