Sterling drifts as BoE rate decision comes into focus

LONDON, Nov 2 (Reuters) - The pound was broadly steady against both the dollar and euro on Monday as investor attention shifted from last week's UK budget to an expected Bank of England rate hike on Thursday, the central bank's first since August 2023.

While other major central banks like the European Central Bank and Federal Reserve have already hiked interest rates this year to combat inflationary pressures from the Iran war-driven energy price spike, the BoE so far has followed a wait-and-see approach. 

"Until now, the Bank would argue it’s been on 'active hold'. It was set to cut rates by upwards of 50 basis points this year, so simply not doing that amounted to de facto tightening. By that logic, the Bank has added a similar amount of policy restriction as the European Central Bank, which has lifted its deposit rate twice," ING economists and strategists said. 

"But the worsening energy crisis has made it much harder for the Bank not to act," they added, saying that inflation is expected to rise above 4% early next year from the current 3.5%. 

BoE policymakers have repeatedly said that the likelihood of a hike grows the longer energy prices stay elevated.

Brent crude futures last week hit multi-month highs, and although they were last down roughly 4.5% on Monday as optimism about a diplomatic resolution to the conflict in the Middle East grew again, they were still at $108.37 a barrel, far above pre-Iran war levels. 

The daily drop in oil prices slightly lifted investors' risk appetite in currency markets, which weighed on the dollar. Sterling was last slightly higher against the greenback at $1.3417, and dipped to 83.53 pence against the euro, which strengthened against the weaker dollar.

Looking ahead, ING said that after Thursday's expected rate hike, a follow-up hike from the BoE in February is also likely, but said that market pricing for BoE rate hikes "looks extreme."

Money markets were last fully pricing in a total of four 25-basis-point rate hikes by next September, according to LSEG data.

This week's central bank action comes after British finance minister John Healey delivered his first budget last week. Healey's spending plans did not provide any surprises, and markets took his plans in their stride with neither the pound nor gilts reacting strongly.

(Reporting by Sophie Kiderlin, editing by Xevi Fontdegloria)