Talking Points:
- The Pound rose versus other major currencies
- BOE keeps rates unchanged at 0.5%
- Sterling’s past appreciation dampening core CPI
The British Pound rose versus other major currencies (at the time this report was written) after today’s BoE rate decision saw interest rates unchanged at 0.5%, as was largely expected by economists. The Monetary Policy Committee (MPC) voted by a majority of 8-1 to maintain the Bank rate at 0.5%, with Ian McCafferty the only member opting for a rate rise, as in prior meetings. The MPC also voted unanimously to maintain QE bond purchase at a total of £375b billion, as expected.
With the decision highly expected, the focus was immediately turned to the meeting’s minutes and the vote split. Looking into the statement, perhaps the most interesting comment by the MPC was that the recent decline in oil prices meant that the expected increase in inflation is set to be more gradual than forecasted in the Committee’s November Inflation Report projections. This comment seemed to be more on the dovish side, but perhaps failed to exceed the market’s dovish expectations. The MPC further commented that the risks to the 2% inflation projections in two years’ time are a little to the downside. The committee said that core inflation was largely subdued due to the past appreciation of the Sterling, weak global inflation and restrained domestic cost growth. Current market volatility was said to underline the downside risks to global growth, mainly stemming from emerging markets.
The BoE is still regarded as the second bank to raise rates after the Fed hiked in the December meeting; but with inflation still well below the 2% target rate, the Sterling has been trading at the lowest levels in 5-and-a-half years versus the US Dollar recently. DailyFX Currency Strategist Ilya Spivak said today that hike expectations have tumbled over recent weeks, making it difficult for the minutes to signal a dovish surprise, which may send the British Pound higher.
