GBP/JPY shows mammoth spike as BoE raises interest rates by 50 bps to 5%

• GBP/JPY has shown extreme wild moves as the BoE has raised interest rates by 50 bps to 5%.
• Surprisingly higher UK inflation forced the BoE to go for a bulk rate hike.
• A continuation of the already decade-long ultra-dovish interest rate policy is expected from the BoJ to keep inflation stable above 2%.

The GBP/JPY pair has shown an extremely wild gyration in a 180.70-182.50 range as the Bank of England (BoE) has surprisingly raised interest rates by 50 basis points (bps) to 5%. The street was anticipating a 25 bp interest rate hike, however, there was a sizeable risk of a bigger interest rate hike. Out of nine Monetary Policy Committee (MPC) members, seven voted in favor of a rate hike as expected by the market participants.

On Wednesday, UK inflation was surprisingly higher than expected. The monthly headline Consumer Price Index (CPI) for May expanded at a pace of 0.7%, matched April’s pace but remained higher than the estimated pace of 0.5%. On an annual basis, headline inflation remained steady at 8.7% while the market was anticipating a deceleration to 8.4%.

Core UK CPI that strips off the impact of volatile oil and food prices printed a fresh high of 7.1% against expectations of steady performance. UK’s core inflation is moving in the wrong direction despite BoE Governor Andrew Bailey having raised interest rates for the 13^th time in a row.

Investors are worried that the promise of halving inflation by year-end made by UK PM Rishi Sunak will be missed amid an absence of evidence of a decline in inflationary pressures. Also, UK FM Jeremy Hunt is avoiding tax cuts as it could infuse fresh blood into inflationary pressures.

On the Japanese Yen front, a continuation of the already decade-long ultra-dovish interest rate policy is expected from the Bank of Japan (BoJ) to keep inflation stable above 2%. Meanwhile, BoJ policymaker Asahi Noguchi has warned that the effect of costly imported goods could disappear around September. Therefore, the central bank must continue keeping rates lower to ensure inflation remains well-supported above 2% through higher wages.