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tinyfav.com May 23, 2018


Sterling steadies before BoE rate decision

11 May 2018, 01:05 | Melanie Burgess

With the United Kingdom inflation decelerating toward the target more quickly than expected in February and the GDP growth slowing down sharply at the beginning of this year, it was no surprise from the Bank of England to keep the Bank rate at the unchanged level of 0.50 percent in May.

The GBP/USD traded around 1.3593 up 0.34% on Wednesday as investors slowly unwound their short positions ahead of the Bank of England rate decision and quarterly Inflation Report which are due later today.

As recently as a couple of weeks ago, financial markets were factoring in a 90 percent probability that the central bank would increase in May its base interest rate by a quarter point to 0.75 percent.

"With the latest Inflation Report showing pricing pressures tailing off - inflation is expected to be just 2.1% this time next year and to hit the 2.0% target by 2020 - rate-setters have kicked the interest rate can down the road once more".

Currently, market pricing suggests that the chances of a rate increase today have fallen to 13% from as high as 87% in April.That reflects both weak United Kingdom economic data and comments by Carney, who told the BBC in an interview last month that an interest rate rise is likely this year but that any increases will be gradual. There has been no sharp increase in swap rates or fixed rates in the mortgage market.

This is largely down to a recent set of figures that showed that the United Kingdom economy grew by just 0.1% during the first quarter of 2018.

"If the forecasts are right then expect interest rates to remain lower for longer as United Kingdom growth lags the rest of the world, inflation subsides and Brexit clouds remain".

It added it continued to believe an "ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon". However, recent activity has seen both two-year fixed mortgage rates and certain savings rates move upwards, so it seems that neither group will have much to cheer or cry about.

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A rate hike this month was seen as a near certainty until the recent first quarter data shock and subsequent gloomy reports from major sectors of the economy.

The 2-year gilt yield fell around 2 basis points after the decision to 0.81 percent.

Mr Carney said the bank's nine-member rate-setting body thinks the "underlying pace of growth remains more resilient than the headline data suggest", according to AP.

He said the bank wanted to see a growth pick-up in coming months before raising borrowing costs. Additional dissenters are unlikely to appear, after Ian McCafferty and Michael Saunders became the first to vote for a hike in March as they were in 2017. Carney has been labeled an "unreliable boyfriend", having already in the past flagged up a rate hike only to back out later.

Minutes to the meeting show the majority of rate-setters preferred to wait to raise rates to "discern whether the softness in the first quarter might persist".

They repeated their calls for a rise to 0.75% to avoid more "abrupt" policy action further down the line.

The MPC said it expected inflation, which fell to a 12-month low of 2.5% in March, to "fade a little faster than previously thought".



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