BoE’s hints and adjustments to monitor dodgy sterling

The latest Inflation Report lowered the GDP forecast profile but hardly touched the inflation forecasts:

At first glance, it seems strange that the combination of a higher oil price and lower exchange rate since February did not push up the inflation forecast, at least in the short term.

The reason it does not is that the Bank assumed that only half the recent exchange rate fall would be sustained, in the event of a vote to remain in the EU. 

The BoE Governor was clearly showered with various interrogations on Brexit consequences:

His repetitive riposte was that the MPC's central projection was based on government policy of remaining in the EU. He did, however, describe the risks to the outlook from a Brexit which would be to lower the exchange rate, boost inflation and depress demand.

He cautioned that it was not possible to know in advance how that trade-off between the last two would work and so whether policy would need to be loosened or tightened in reaction.

The MPC still projects that inflation will overshoot the 2% target to reach 2¼% in three years' time:

- Even though the OIS curve now predicts that the first rate increase will not occur until the turn of 2018/2019. Just repeating the usual mantra that “it is more likely than not that Bank Rate will need to be higher by the end of the forecast period” to keep inflation on target seems a less than bold reassertion that policy still needs to be tightened.

Sterling markets were focused on the Bank of England yesterday, well, BoE alerts on downside risks on conditional basis of Brexit event.

To substantiate, we would foresee GBP on weaker side on BoE's alerts of the economic risks if Britain votes to leave the European Union, saying on Thursday that sterling could tumble harshly and unemployment would probably rise. The central bank sends this caution of this event risk after leaving their bank rates unchanged at 0.50%.