FXStreet (Guatemala) – James Rossiter, Vice President & Senior Global Strategist, Global Strategy at TD Securities noted the outcomes of the BoE’s super Thursday today and explained.
Key Quotes:
“After 7 months of unanimous 9-0 votes, the MPC voted as expected 8-1 to hold Bank Rate at its current 0.5% level, and the stock of asset purchases at £375B.
While near-term inflation forecasts were revised down on account of lower energy prices and an stronger GBP, the medium-term inflation outlook in the August Inflation Report remained largely unchanged from May. This reinforces our view that the BoE isn’t ready to pull the trigger on higher rates until February next year.
The MPC’s estimate of slack in the economy remains unchanged from the May Report, at 0.5% of GDP.
Despite all the excitement leading up to today’s first BoE “Super Thursday”, like in May, the August policy decision and Inflation Report were ultimately relatively uneventful. The biggest change was the first dissent in 8 months, coming from Ian McCafferty, although this was the minimum degree of dissent expected by most observers. We expect additional MPC members to dissent at upcoming meetings with Weale the next likely candidate.
The MPC’s inflation and output forecasts were largely unchanged from May. The tweaks were made mostly to the near-term. While the MPC pointed to weaker energy prices and a stronger GBP as key factors weighing on CPI inflation this year, the MPC’s forecast for inflation in the medium-term remained largely unchanged. Total inflation is expected to reach 2.0% two years out, and 2.1% in the third year of the forecast, as in the May Report.
The output forecast also remained largely unchanged. With output expected to grow just slightly faster than underlying potential, the degree of slack (0.5% pf GDP) is expected to dissipate over the forecast horizon.
Governor Carney’s press conference repeated the key messages from the Inflation Report. He reiterated the view that the MPC expects wages and unit labour costs—and hence support for inflation—to gradually move higher.
Overall, this report maintains our view that the first increase in Bank Rate will come in H1 2016—most likely at the February 2016 MPC meeting. However, data between now and then will be of key importance to the timing, with the Minutes highlighting wage growth, productivity, measures of core inflation, import prices, and risks to the international environment as key areas to watch.
Ultimately, the BoE has largely validated the current market pricing in rates markets and we expect these to coalesce around next February as the timing of the first rate hike in coming weeks. At the same time, they did not express too much discomfort with FX developments. GBP strength has influenced the policy outlook, but the MPC is not ready to sound the alarm over its appreciation. With the GBP’s overall backdrop favouring further strength, we expect sterling to register additional gains in the weeks ahead.”
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