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Pound `Clinging' Onto Hawkish BOE With ING Eyeing 7-2 Vote Split

11 Mai 2018

The pound dropped sharply when it was first revealed that BoE officials had rejected a May interest rate hike, but the recent appreciation suggests some background resilience.

Although rates remain at a very affordable level, even a slight increase could have further dampened the hunger of United Kingdom home buyers, and in a misfiring market that is already struggling to whet their appetite, this may have further stunted price growth.

Professor Peter Urwin, director of the Centre for Employment Research, said the decision to hold rates down had not been a foregone conclusion.

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. If the manufacturing production falls to -0.2% or lower, then the odds for an August rate hike will fall further. GBPUSD made a 4-month low of 1.3455 after the BOE despite some optimistic comments by Carney in the Q&A. "We target 0.88 in 1M and 0.8650 in 3M".

The disappointing data also added further support to the UK's latest GDP estimate which suggested the United Kingdom economic got off to a slow start in 2018. While the BOE keeps alive the prospect of tighter policy to come, its statement suggests a gentle pace.

'The costs to waiting for additional information were likely to be modest, ' according to the report.

The Pound (GBP) exchange rate plummeted against the majority of its peers on Thursday as markets reacted to the Bank of England's (BoE) latest policy meeting. The near-stalling of the economy has led the MPC to cut its annual growth forecast to 1.4% for this year, although it has left its forecasts for 2019 and 2020 unchanged at 1.7%. But it said this is partly because the pass-through of the pound's depreciation since the Brexit vote is happening faster.

A month or so ago it looked like a May rate rise was a near-certainty.

'In a world where other central banks are seeking to normalise their rates, the combination of slow growth and Brexit uncertainty must surely be raising some concerns about the size of the current account deficit'. Inflation was seen dropping to 2.1 per cent in a year's time, and returning to target a year later - sooner than previously thought - but only if interest rates rose by 25 basis points about three times over the next three years, as markets expect. Sweden's Riksbank and the Bank of Canada have also revised their tightening expectations.

Up until a couple of weeks ago it appeared inevitable that we would see a rise in United Kingdom rates of 25 basis points to 0.75%, which would have been the first time that rates would have shifted above 0.5% since they were slashed to their current levels in 2008.

Pound `Clinging' Onto Hawkish BOE With ING Eyeing 7-2 Vote Split