The Bank of England’s monetary policy committee voted unanimously to keep the Bank Rate and the stock of bonds unchanged during its meeting today. The BoE stated that there has been a softening of the economy in recent months, due to increased Brexit-uncertainty and lower growth abroad. Uncertainties might lead to higher than normal volatility in data according to BoE. Inflation in December had eased to 2.1 percent, but the central bank expects somewhat higher inflation going forward. Therefore, as somewhat higher signal rate is needed for reducing inflation towards the target in the medium term.
The central bank has lowered its GDP growth forecast for 2019 and 2020 to 1.2 percent and 1.5 percent, respectively. However, it has raised its forecast for 2021 to 1.9 percent. Business investments are now likely to fall in 2019, while expectations for household demand have risen. The inflation forecast was 2.1 percent for the fourth quarter of 2019 and for the fourth quarter of 2020. The new forecasts are 2 percent and 2.1 percent for the fourth quarter of 2019 and 2020, respectively.
“There will likely be no monetary changes until the Brexit process has been clarified. In the case of a soft Brexit, BoE will likely continue to hike rates gradually as wage costs has continued to rise and may rise further”, said DNB Markets in a research report.
Nevertheless, GBP might probably strengthen in such a scenario, dampening the inflation going forward. In such a scenario, the BoE is likely to hike in late 2019, most likely in November.
“In the case of a hard Brexit, which seems less likely, a strong negative shock to the economy will imply the need for rate cuts rather than hikes. A weakening of GBP will likely imply a positive shock to inflation, but BoE will have to see through such a shock”, added DNB Markets.
At 14:00 GMT the FxWirePro's Hourly Strength Index of British Pound was highly bullish at 131.909, while the FxWirePro's Hourly Strength Index of US Dollar was bullish at 96.4743 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex
