Some dovish signals from the BOE

While Fischer was candid in his explanations about the transmission of the exchange rate on US output and inflation, it can be assumed that all other central banks will be doing similar analysis. In fact, since the US economy retains a more moderately sized ratio of merchandise trade/GDP than most other major economies it can be assumed that other central banks are more sensitive to the value of their exchange rate. 

The surprisingly dovish tone from BoE Governor Carney in the presentation of the November Inflation Report was likely influenced by a desire to avoid a punitive cost being slammed on UK economic activity via the value of sterling. Despite warning that the next policy move would be a hike, Governor Carney conveyed this message in a very dovish way. This was managed by stressing the risks posed by weak global growth and warning that "crystallisation of these risks "could impact the UK expansion. 

This aside Carney gave an upbeat assessment of the domestic UK economic backdrop describing demand as resilient and investment as strong. Notably, however, the BoE cut its CPI forecasts and suggested that the impact of the pound would persist. This latter statement appeared to be a direct recognition of the risks that sterling could rise further if the ECB eases further. The value of the UK effective exchange rate is currently almost 20% above its 2013 low. 

Given the importance of the Eurozone as a trading partner to the UK, one of the driving factors of this move has been the broad based weakness of the EUR through much of this period. If the ECB pressures the value of the EUR lower by increasing policy stimulus in December, it is likely that the UK would suffer a tightening in monetary conditions via an appreciation in the value of sterling. It follows that the more aggressive the ECB is in its policy decisions, the less reason the BoE is likely to have to rush into a rate hike. 

"We are currently expecting steady rates from the BoE until August 2016", says Rabobank.