Sterling Soars as BoE's King Calls Interest Rate Cuts Counterproductive
THE TAKEAWAY: BoE’s King calls interest rate cuts counterproductive -> BoE report lowers inflation and growth forecast -> Sterling soars
The Bank of England’s inflation report and Governor King’s ensuing press conference sent mixed signals to investors looking for guidance on the possibility of further monetary stimulus. The report cut the annual growth forecast to 2% in two years, down from May’s 2.5% forecast, but King said he expects a rebound in Q3. The bank report also said inflation will fall a bit underneath its initial targets, down to 1.6% in two years, but King added that the consumer prices forecast doesn’t suggest an urgent need for more stimulus. Bloomberg surveyed economists expected the report to lower both forecasts.
On the chances of further monetary action, King teased those looking for signs of further stimulus, by saying that the BoE will do all it can to generate a UK recovery. He then said that the bank sees interest rate cutting as more damaging then beneficial, and that asset purchases will be the BoE’s main stimulus instrument. King also mentioned that indicators for the bank’s funding for lending scheme are positive.
Referring to the 0.7% drop in the UK’s 2Q GDP, King said the extra Jubilee holiday contributed to a 0.5% contraction; he added that the gains from the Olympics won’t equal the amount of GDP lost to the Jubilee. The report also added that threat of an extreme Euro outcome is weighing on the UK economy.
Sterling trading remained relatively unchanged following the initial release of the report, before shooting up as King called interest rate cuts counterproductive. GBPUSD climbed about ninety points during King’s press conference, stopping just short of 1.5650. The pair is still sitting in a two-month trading range that has seen resistance around 1.5717 and support around 1.5475.
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