British Pound Sterling (GBP) Forecast Turns Negative on Dovish Bank of England Statements

February 4, 2016 - Written by Minesh Chaudhari

STORY LINK British Pound Sterling (GBP) Forecast Turns Negative on Dovish Bank of England Statements

Dovish BoE Weighs Heavily on Pound Sterling (GBP) Exchange Rates

Sterling-holders had been hoping for a positive commentary regarding the state of the UK economy from the Bank of England (BoE) this afternoon. However, they were left severely disappointed when ‘Super Thursday’ yielded no change in policy, but instead a decidedly downbeat message from the Old Lady of Threadneedle Street.

Investors holding the Pound were dealt a double blow, with the minutes of this week’s BOE monetary policy meeting revealing that all nine committee members had voted to sit on their hands and leave Base Rate at 0.5%.

Policyman Ian McCafferty has been the committee’s serial dissenter during recent months, voting for a hike at every meeting from August until January, but even this arch-hawk could not find it within himself to come out in favour of a hike this month, given continuing ultra-low global oil prices.

BoE Downgrade 2016 Growth Forecast, Further Weakening Pound Sterling

The BoE really stuck the knife into the Pound with the publication of its latest quarterly Inflation Report which contained a headline-grabbing downgrade to the Bank’s 2016 Gross Domestic Product growth forecast from 2.5% to 2.2%.

The missive observed a weakening of earnings growth in the domestic labour market, noting that, ‘the MPC has revised down its estimate of the level of potential supply broadly in line with the lower level of demand. Resilient private domestic demand growth is expected to produce sufficient momentum to eliminate the limited margin of spare capacity during the course of this year.

However, wage growth has been weaker than anticipated and labour costs are expected to rise a little less quickly than thought at the time of the November Inflation Report, contributing to a slower recovery in inflation.’

The report went on to forecast that, ‘the scale of recent commodity price falls means that CPI inflation is likely to remain below 1% until the end of the year. As the drags from energy and other imported goods unwind, however, domestic cost pressures are projected to build up sufficiently such that, conditioned on the path for Bank Rate implied by market interest rates, CPI inflation is likely to exceed the 2% target slightly at the two-year point and then rise further above it.’

The prospect of low inflation into 2017 makes a UK interest rate hike highly unlikely any time soon and the Pound is now forecast to trade on a neutral to negative footing moving forward.

BoE Broadbent Downplays Apparent ‘Brexit’ Risks

According to BoE deputy Govenor, Ben Broadbent, the Bank of England has not seen heightened risks from the impending EU membership referendum, a sentiment echoed today by Mark Carney.

There has been little sign that companies are freezing their spending in the run up to the crucial vote, Broadbent claims, telling the BBC that:

‘We have not yet seen, regarding investment intentions, any weakening of those of late,but obviously it’s something we watch pretty closely.’

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TAGS: Pound Sterling Forecasts