BOE votes 7:1, see a “smooth” Brexit – GBP falls

The BOE left its policy unchanged, as widely expected. The QE program remains at 435 billion pounds and the interest rate at 0.25%. Once again, one member voted for a hike: Forbes. The vote was 7:1 as Charlotte Hogg did not participate.

The accompanying meeting minutes contained a hawkish comment: “the UK may need tighter policy than yield curve implies”. This, in turn, implies a rate hike somewhere along the line.

However, the Quarterly Inflation Report includes a much softer tone. Inflation is now expected to peak in Q4 2017 at 2.8%. This is below the 1-3% range that the BOE targets. So, a rate hike is not coming anytime soon.

In addition, Carney and his colleagues assume a “smooth” Brexit. It is unclear where these assumptions come from. The UK government has recently clashed with Brussels. So, the BOE may be too optimistic. Carney says that

GBP/USD reacts with a drop from 1.2920 ahead of the publication to a low of 1.2866 before bouncing to around 1.2880.

The Bank of England was expected to leave its policy unchanged one month ahead of the UK elections. Last time, one member voted for a rate hike, but a unanimous vote was on the cards now. In addition to the decision, the Bank also releases its Quarterly Inflation Report (QIR). The latter includes forecasts for growth and for inflation.

The pound recently jumped to higher levels, on the backdrop of the announcement of a snap election in the UK. The stronger exchange rate dampens inflation and relieves the BOE from pressure to raise rates.

More recent data has been weak: the UK economy grew by only 0.3%[1] q/q in the first quarter of 2017, half the previous levels of growth. Data released earlier in the days showed a drop in industrial output and a wider trade deficit[2]. These pushed the pound lower.

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from Forex Crunch

from Online Forex Trading Resource
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