GBPUSD Tests 1.36 Handle Ahead of BOE's Interest Rate Announcement

11 May, 2018, 01:03 | Author: Gladys Mathis
  • British economy growth

The bank's Monetary Policy Committee voted 7-2 to keep the main interest rate at 0.5 percent, a decision that seems swayed by weak economic data in recent days.

- The Bank of England's monetary policy committee will nearly certainly leave all its settings, including United Kingdom interest rates, unchanged today.

The BOE governor spoke after officials kept the key interest rate at 0.5 percent, citing the first-quarter slump, and said inflation will weaken faster than previously thought.

BoE governor Mark Carney suggested in April that the central bank might not raise rates in May because of the mixed economic data, causing a sharp reversal in bets on a May hike. Ahead of the latest batch of soft UK CPI and GDP reports and dovish comments by the head of the Bank of England, the rates markets had priced in a 25-bps rate hike with a likelihood of 100%.

The Bank cut its growth forecast for the year to 1.4%, down from the forecast of 1.8% made in February. The Bank of England adjusts the base rate in accordance with the general economic climate in order to either encourage saving or spending with the general aim of maintaining a prosperous and stable economy.

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Pound US Dollar (GBP/USD) Exchange Rate Trades Lower Ahead of US Inflation ResultsAcross the pond investors are now waiting for the US consumer price inflation results, with the GBP/USD exchange rate paring gains in the meantime. Sterling fell to a day's low of $1.352, reversing earlier gains, and the yield on two-year British government bonds, which are sensitive to monetary policy expectations, fell modestly.

For the two dissenters on the MPC - Ian McCafferty and Michael Saunders - the case for an immediate rate rise had not changed, given the "temporary or erratic" first quarter growth data.

The Bank said that there may be a small rise in inflation in the coming months due to higher oil prices, but this should have little effect on the longer-term outlook.

Currently, the Bank of England rate stands at 0,5% and is expected to rise to 0,75%, probably later this summer rather than now. "With rates still rooted at emergency levels, this is one of the challenges faced by the Bank and how it chooses to deal with this will be key to the success of the United Kingdom economy in coming years". The BOE is anxious that weak productivity growth and subdued investment since the 2016 Brexit vote make it hard for the economy to meet nearly any strengthening of demand without overheating.

The inflation forecasts also show that any lost economic output in the first quarter would not be recovered throughout the remainder of the year, despite expectations for the second quarter to be "commensurately stronger".

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