• BoE lifts interest rates by 25 bps in line with market expectations
  • Voting proves to be more hawkish as just 2 members opted for unchanged
  • BoE statement drops a line that rate may need to rise more than market expects
  • GBP jumps and slumps in the aftermath of the BoE decision

The Bank of England chose to raise interest rates by 25 basis points to 0.5% as expected keeping its monetary stimulus (the QE program) in place. The pound jumped in a knee-jerk reaction, however it abruptly made a U-turn. The key points from the BoE statement are as follows:

  • BoE drops a line that rate may need to rise more than market expects
  • potential growth has dropped because of weak productivity
  • spare capacity being eroded faster than anticipated
  • future rate increases will be limited and gradual
  • CPI to peak in October 2018 at 3.2% vs. 3% seen previously
  • considerable risks seen to outlook from Brexit
  • Voting saw 2 dissenters instead of 3 projected

One needs to underline that the BoE had to rise rates in order to avoid depreciation of the GBP given undue expectations. Basically it did what had to do but at the same time it sent to the market some dovish remarks. We may conclude that today’s hike is ’a one and done scenario’ as the BoE cooled off market expectations as far as subsequent rate rises are concerned. The Bank decided to drop a line that rates may need to rise more than market expects which could be seen as a prognosis that there are no imminent hikes (a main rate is forecast to increase to 1% by 2020) as it sees considerable risks to the economic outlook from Brexit negotiations. On the other hand the Bank admitted that potential output has been reduced due to weak productivity while labor slack is limited. Both remarks suggest that inflationary pressures could come in a little bit faster. Nevertheless, the main message sent from the BoE is that rate hikes will be very gradual which could be slightly disappointing for GBP buyers.

The BoE also cut its GDP forecasts for this year and 2019 while it left the projection for 2018 at 1.6%. Furthermore, the inflation projections were adjusted as well but the longer-term seems to suggest that inflation ought to subside as the 2018 forecast was slashed from 2.5% to 2.4% while the 2019 estimate was left unchanged at 2.2%. Even as inflation is seen subtly lower compared to the prior forecasts, notice that the BoE sticks to its view that price dynamics will stay above the objective up to 2020.

link do file download linkInflation forecasts were slightly adjusted but the BoE projects CPI to stay above the target up to 2020. Source: BoE

link do file download linkGDP forecasts were marginally lowered which could suggest that Brexit-related risks may weigh on the economic outlook going forward. Source: BoE

By and large today’s outcome is broadly in line with expectations, however the pound has slumped on the back of the release as the BoE has closed the door when it comes to another rate hikes in the nearest future. Taking into account that the FED is on course to lift rates in December one may suspect that the GBPUSD could be heading lower till the end of the year. Besides, the EURGBP could go higher even as the EURUSD may go off the boil in the upcoming weeks.

link do file download linkThe EURGBP is drawing a bullish morning star pattern suggesting that bulls could return. Once they keep a lid on on the market a breakout of a resistance placed at 0.8995 might be on the cards. Source: xStation5