British Pound Slightly Lower on Dovish BoE, Markets not Surprised
- BOE keeps rates unchanged at 0.50% by a unanimous decision (9-0).
- Inflation projected at 1.2% at Q1 2017, down from 1.5%.
- GBP-crosses traded sideways to lower around the announcement.
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The British Pound traded slightly lower versus other major currencies (at the time this report was written) after today’s BoE rate decision saw interest rates unchanged at 0.50%, as was expected by economists. The Monetary Policy Committee (MPC) voted unanimously 9-0 to maintain the Bank rate at 0.50%. Ian McCafferty, who was the only member opting for a rate hike since August 2015, dropped his vote for a rate increase. The MPC also voted unanimously to maintain QE bond purchase at a total of £375b billion.
As the decision was highly expected, the focus turned to the meeting’s vote count followed by the minutes and the publication of the quarterly Inflation Report. The fact that McCafferty dropped his vote for a rate increase seems to paint a more dovish picture on the BoE’s outlook going forward. Looking into the Minutes statement, the MPC emphasized effect of the slide in oil prices, volatility in global equities and commodities, and China’s slowdown. The MPC commented that risks to the central projection are skewed a little to the downside in the near term, reflecting the possibility of greater persistence of low inflation.
Coming into today, the UK CPI readings, which was 0.2% in December, has been far below from meeting the central bank’s inflation target of 2%. With the slide in oil prices from the start of the year, the bank previously commented that the 2016’s forecast will probably be cut again. The quarterly Inflation Report said the BoE see inflation, at 1.2% in Q1 2017, down from a projection of 1.5% from November’s Inflation Report. The Central bank sees inflation at 2.05% in two years time, slightly above target.
As was mentioned today by DailyFX Currency Strategist Ilya Spivak, the markets have positioned for a dovish outcome; Overnight index swaps (OIS) has dropped to the lowest level since May 2013, with the baseline view of a 64% probability that rates remain unchanged and a 36% probability of a 25 bps cut by February 2017. Up until very recently the central bank was considered likely to raise rates in 2016. Is seems the markets perception was largely in line with the meetings outcome, so the British Pound saw only a slight negative reaction.
Chart 1: GBP/USD 5-minute Chart (Intraday): February 4, 2016
Missed today's Bank of England meeting? Watch the webinar archive of today's live event coverage with Currency Strategist Christopher Vecchio.
-- Written by Oded Shimoni, DailyFX Research
To contact Oded, email him at email@example.com
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