Hawkish BOE Removed Easing Bias

British pound rallied as BOE removed rate cut bias. GBPUSD soared to almost a one-month high of 1.2494 while EURGDP plunged to as low as 0.8856. Governor Mark Carney suggested the central bank has “a neutral bias around policy going forward” as the “monetary policy can respond in either direction”. The members voted unanimously to leave the policy rate unchanged this month. The chance of a rate cut this year has become very remote. Certainly, the pound’s rally is further boosted by a UK court ruling that the government must hold a vote in Parliament before starting the two-year countdown to Brexit, raising uncertainty on whether PM Theresa May would be able to trigger Article 50 by next March as she indicated.

Policymakers turned more upbeat on the near-term economic developments. As mentioned in the minutes, output growth was “expected to be stronger this year, reflecting the resilience in particular of indicators of household spending and sentiment”. However, the medium-term outlook would weaken, driven by “lower real income growth on household spending as a consequence of the depreciation of sterling” and “persistent uncertainty over future trading arrangements”. As such, BOE upgraded its GDP growth forecast to +2.2% in 2016, compared previous estimate of +2%. It also revised higher the 2017 growth forecast to +1.4% from +0.8% previously. Growth in 2018 is revised lower to +1.5%, down from the +1.8% forecast in August.

On inflation, BOE now expected it to rise above its +2% target early next year and stay above that level through its forecast period. The central bank projected that inflation could rise to +1.3% in 2017 before accelerating to +2.7% in 2018. It would then moderate to +2.5% in 2019 and return to the +2% target by 2020.

Regarding recent weaknesses in the currency, Carney noted that the central bank does “not target the exchange rate”. He added, however, that the central bank also cares about “why it moves and the combination of the exchange rate and other factors that are driving the economy and inflation”. Policymakers assessed that the impact of pound’s depreciation on inflation would “ultimately prove temporary, and attempting to offset it fully with tighter monetary policy would be excessively costly in terms of foregone output and employment growth”.

Hawkish BOE Removed Easing Bias