Pound Sterling Forecast to Underperform Following Bank of England Comments

January 15, 2016 - Written by David Woodsmith

STORY LINK Pound Sterling Forecast to Underperform Following Bank of England Comments

Bank of England Inaction Caused the Pound to Weaken

The Bank of England (BoE) surprised nobody by maintaining the funds allocated to its Quantitative Easing programme at the current level of GBP375 bn yesterday.

The announcement that UK interest rates would be maintained at their current record low of 0.5% was also widely expected, but the tone of the commentary contained in the minutes of the BoE meeting heaped further pressure on the Pound Sterling (currency : GBP).

Soft Energy and Food Prices Weigh on British Inflation Expectations

Conventional wisdom states that the BoE will not countenance any increase in Base Rate until there is a pronounced uptick in the rate of UK price rises, so the minutes’ observation that, ‘twelve-month CPI inflation rose to 0.1% in November and is likely to rise modestly further in the coming months as some of the large falls in energy and food prices a year earlier drop out of the annual comparison,’ hit the Pound hard.

The minutes went on to suggest that, ‘the 40% decline in dollar oil prices means that the increase in inflation is now expected to be slightly more gradual in the near term than forecast in the Committee’s November Inflation Report projections. Although a large part of the current deviation of CPI inflation from the 2% target reflects unusually large drags from energy and food prices, core inflation also remains relatively subdued – a consequence of the past appreciation of sterling, weak global inflation and restrained domestic cost growth.’

Analysts took this at a signal that the cost of borrowing in the UK will remain at ultra-low levels for the remainder of this year and well into next year and futures market participants concurred.

GBP to EUR Exchange Rate Dropped to 11 1/2-Month Low with Further Losses Forecast

The Pound struggled in the markets thanks to the continued subdued UK interest rate expectations which the minutes engendered.

The Pound Sterling euro exchange rate slumped to a fresh 11 ½ month low of 1.3152 GBP EUR during the middle part of yesterday’s session and analysts forecast that there could be further losses to follow for Europe’s leading currency pair.

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TAGS: Pound Euro Forecasts Pound Sterling Forecasts