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British Pound Drops as BoE Remains Calm on UK Inflation Outlook

British Pound Drops as BoE Remains Calm on UK Inflation Outlook

Nick Cawley, Senior Strategist

Talking Points

- BoE remains vigilant but calm on any inflation overshoot although some members raised concerns

- Big upward revision in UK 2017 GDP growth to 2% from 1.4% three months ago

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

Bank of England governor Mark Carney left all UK monetary policy measures unchanged Thursday, but upgraded growth projections for the next three years. And while cost price pressures are still a concern – the MPC’s tolerance for above target inflation is ‘limited’ – the Governor actually downgraded the central bank’s forecast for 2017 inflation to 2.7% from 2.8% in the last Inflation Report in November. The minutes also reiterated that monetary policy could still be loosened or tightened, given the uncertain economic outlook with Brexit negotiations looming on the horizon.

The BoE upgraded 2017 GDP growth to 2% from November’s 1.4% and August’s 0.8%, and nudged both 2018 and 2019 growth 0.1% higher to 1.6% and 1.75% respectively.

The central bank downgraded 2017 inflation expectations to 2.7% from 2.8% and left 2018 expectations unchanged at 2.6%. The report says that the recent 3% rise in Sterling and higher gilt yields has tempered price pressures for the time being.

In his press conference, Governor Carney also noted that ongoing Brexit uncertainties are having a material effect on investment decisions and that the true effects of the UK leaving the EU will not be felt until after the central bank’s projection periods.

GBPUSD fell back below 1.26000 on Carney’s comments but could draw short-term support from the better-than-expected GDP forecasts. The sharp upgrade to 2.0% today is in stark contrast to the BoE’s projections of 0.8% in the August Inflation Report and should feed through and underpin Sterling, helping to push imported inflation even lower.

Chart: GBPUSD 5-Minute Timeframe (January 24-February 2, 2017)

--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

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