The BOE left the Bank Rate unchanged at 0.5% and the asset purchase program unchanged at 435B pound. The members voted unanimously (9-0) for the decision. What caught the market attention most is the comment that the“monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report”. The market has raised bets to 70% for a May rate hike and 80% for August. On the economic growth outlook, the staff raised the GDP growth forecasts for both 2018 and 2019. Inflation would remain strong in coming years and is expected to remain persistently above target at 2.2% in 1Q20 and 2.1% in 1Q21.
On the updated economic forecasts, the members lifted the GDP growth forecast to +1.8% (previous: +1.6%) for 2018 and to +1.8% for 2019 (previous: +1.7%). The members have also turned more upbeat over the employment situation. As such, they have revised lower the NAIRU, the equilibrium unemployment rate, to about 4.25%, from 4.5% previously. Meanwhile the overall slack within the economy is expected to be just below under 0.25% of GDP.
Inflation should remain firm and persistently above the +2% target over forecast horizon. The members forecast inflation to reach +2.2% in 1Q20 before easing slightly to +2.1% in 1Q21. Overshooting of inflation has been a concern of the central bank, even triggering it to increase the interest rate last November, although economic growth and confidence level remained soft. The minutes for the February meeting noted that it is “appropriate to set monetary policy so that inflation returns sustainably to its target at a more conventional horizon”. It is believed that the central bank now focuses on a 2-year horizon, rather than three. Note that the central bank has revised the inflation outlook higher for the near term, thanks to the recent rise in oil prices. Inflation after this year is revised lower after the strong oil impact fades. Depreciation of British pound would continue to have impact on the general price level but the effect is diminishing.
On the monetary policy outlook, the BOE noted that it would “need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period” than anticipated in November. Yet, it added that any rate hike would be “limited” and “gradual”. The market has now priced in 70% chance for a May rate hike and 80% for August.
Link to the source of information: www.actionforex.com
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