Bank of England Votes Unanimously

Market Trends - 04/02/2016

Although today’s interest rate decision from the Bank of England comes as no surprise, with rates holding at 0.50%, the fact that the decision was unanimous amongst policymakers after months of Monetary Policy Committee Member Ian McCafferty dissenting marks a major turning point.  The change in positions comes amid the tapering pace of economic expansion in the United Kingdom with GDP growth slowing and other fundamental data faltering. Policymakers are striking an increasingly dovish tone as the outlook for the economy and inflation are revised further to the downside to reflect worsening conditions.  Today’s report underlined the challenges ahead, with interest rates not expected to begin rising until the end of 2017 according to current market estimates.  Furthermore, inflation is forecast to rebound to 1.00% by the end of 2016, only reaching the Central Bank’s target of 2.00% in the first quarter of 2018.  In contrast with November’s forecasts, GDP growth projections were also cut, with the 2016 outlook revised lower to 2.20% growth versus 2.50% in the prior estimate.

According to comments from BoE Governor Mark Carney, while the basic assumption is that inflation will gradually experience a pickup, the Central Bank remains prepared to deliver whatever measures necessary to drive inflation back to targeted levels.  Annualized headline inflation at 0.20% is proving great for improving disposable income, but might have a secondary effect on wage growth amongst consumers.  This could very well impact consumption down the road, especially if prices enter a deflationary phase and consumers postpone purchases to take advantage of potential discounts.  Key to sustained growth and success hinges on reducing remaining slack and spare capacity in the economy.  Thanks to strong growth in the services sector, external risks will likely be moderated by the relative strength of the domestic economy.  Although the Pound has continued to rebound higher against the dollar amid softer data from the United States and dovish comments from policymakers, further downside in Sterling is possible especially with near-term risks remaining biased downwards.


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