BOE surprisingly voted unanimously to raise the Bank rate, by +25 bps, to 0.75%. This marks the first increase since last November and the second since global financial crisis. The Committee revised higher forecasts for GDP growth and inflation for this year and in 2019. At the press conference, Governor Mark Carney signaled further rate hikes are likely so as to keep inflation around the +2% target. British pound initially climb higher before tumbling. GPBUSD has slumped to almost a 2-week low of 1.3013 at the time of writing this report.
Updated Economic Forecasts:
As we have mentioned in the preview, economic recovery in the second quarter has reinforced the view that the slowdown in the first quarter was driven by temporary factors, rather than underlying weakness. At the minutes for the August meeting, BOE suggested that “recent data appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter”. Moreover, “the labour market has continued to tighten and unit labour cost growth has firmed. The MPC continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further”.
On inflation, the members acknowledged that “CPI inflation was +2.4% in June, pushed above the +2% target by external cost pressures resulting from the effects of sterling’s past depreciation and higher energy prices. The contribution of external pressures is projected to ease over the forecast period while the contribution of domestic cost pressures is expected to rise”. Indeed, at the press conference Carney admitted that inflation will be over the Bank’s +2% target over the next 3 years, if interest rates stay at 0.75%. this appears to signal that further rates are likely so as to prevent inflation overshoot. However, BOE reaffirmed the stance that “any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent”.
The major downside risk to growth and to further rate hike remains Brexit uncertainty. BOE reiterated that “the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal”.
Concerning BOE’s estimate of the neutral rate (R*), the level at which interest rates should be set to ensure the economy stays at an even keel. The central bank’s estimate of the R* is 0-1%, more than 2 percentage points below its pre-financial crisis level, as pulled down by UK productivity, fiscal headwinds and economic uncertainty. Carney added that if all those improve, R* could move closer to the 2-3% range.
The bounce of British pound proves short-lived. We believe the renewed selloff of the currency was driven by the affirmation that further rate hike would be “gradual” and limited. While Carney has hinted that the next move would be a hike, rather than a cut, this has already been priced in. Meanwhile, the market tends to be skeptical over Carney’s hawkish comments amidst his “unreliable boyfriend” image. Another disappointment comes from the low R*. While the level of such rate might change over time, the upper bound, at 1%, estimated currently signals further rate hike is limited.
Signal2forex.com - Best Forex robots and signals
