The Bank of England kept the Bank Rate and the stock of bond purchases unchanged today. The decision was unanimous. According to BoE, data have been mixed since the prior meeting; however, they have been consistent with the forecasts in the February inflation report. The widespread weakening in global GDP and trade growth has continued, while global financial conditions have eased. Brexit uncertainties have continued to be a drag on short-term economic activity, markedly business investment.
The headline inflation rose a bit to 1.9 percent in February and is likely to be close to the 2 percent target in months ahead. The Bank of England maintains the guidance of “an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent”.
The economy considerably depends on the nature and timing of Brexit, whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond. The central bank keeps the mantra that “the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction”.
According to a DNB Bank research report, there will likely be no monetary changes until the Brexit process has been clarified. If there is a soft Brexit, with an approvement of the withdrawal agreement, the BoE might continue to hike rates gradually as jobless rate has dropped and wage costs has continued to increase. Nevertheless, GBP will probably strengthen in such a scenario, dampening inflation going forward. In such a scenario, the BoE might hike in late 2019, mostly likely in November, said DNB Bank.
In the case of a hard Brexit, a solid negative shock to the economy might suggest the need to cut rate and a new round of quantitative easing. If the Bank of England continues to regard 0.5 percent as the floor for the Bank Rate, there will be no room for more than one cut.
“Hence, it seems very likely that a new round of QE will be necessary to counteract such a negative shock. A weakening of GBP will likely imply a positive shock to inflation, but BoE will have to see through such a shock”, added DNB Bank.
At 17:00 GMT the FxWirePro's Hourly Strength Index of British Pound was highly bearish at -125.869 while the FxWirePro's Hourly Strength Index of US Dollar was slightly bullish at 57.014 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex
