Talking Points
- The Bank of England left its asset purchase program unchanged and UK bank rate at 0.25%.
- However, in a major surprise, three MPC members voted for a rate hike.
- All eyes are now on a speech by the BoE Governor at the Mansion House later today.
- Check out the DailyFX Economic Calendar and see what live coverage of key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.
There was one major surprise Thursday as the Bank of England left its bank rate unchanged at 0.25%, its gilt (UK government bond) buying at £435 billion and its corporate bond purchases at £10 billion. Three of the Bank’s monetary policy committee voted to increase rates whereas only one had been expected to. Now, GBP traders are focusing on a speech to be given this evening, UK time, by BoE Governor Mark Carney at the Mansion House in the center of London’s financial district.
UK Chancellor of the Exchequer Philip Hammond had been scheduled to speak too but has dropped out because of the London tower block fire.
The BoE decision not to alter its monetary policy settings reflected the mixed picture for the UK economy at present. While consumer price inflation has risen well above the 2% target to 2.9%, other data this week have shown weak wages growth, pointing to a fall in real incomes, and weak retail sales. However, only five members of the Bank’s monetary policy committee voted for unchanged rates, with three voting for a hike. It had been expected that seven would vote for unchanged rates and just one for an increase.
The latest data point to weak second-quarter UK GDP growth and additional concerns for the BoE include the inconclusive result of the General Election and the approach of the Brexit talks between the UK and the EU. Hammond had been expected to refer to an increased probability of a “soft” Brexit at the Mansion House, while Carney may refer both to Brexit and domestic political uncertainty.
As yet, there has been no agreement between Prime Minister Theresa May’s ruling Conservative Party and Northern Ireland’s Democratic Unionist Party, which will have to come to some arrangement if she is to keep her majority in Parliament.
For the British Pound, these factors are pulling in different directions. While political uncertainty is bad for the currency, the prospect of a soft Brexit is positive. However, GBPUSD has been pulling back from the psychologically-important 1.30 level in recent days and could yet drop further – particularly following the hike in US interest rates by the Federal Reserve Wednesday.
This session, though, GBPUSD surged on the unexpected change in the voting pattern.
Chart: GBPUSD Five-Minute Timeframe (June 15, 2017)
The decision by three MPC members to vote for a quarter-point rate rise was the most votes for an increase since May 2011, although all MPC members agreed any rises would be gradual and limited. The votes to keep the asset-purchase program unchanged were unanimous. It was the closest the Bank has come to a rate rise since 2007.
As for the future, the Bank said CPI inflation could exceed 3% by the autumn, lifted by the weakness of Sterling since the Bank’s May Inflation Report. It added that its tolerance of above-target CPI inflation is being eroded, and predicted that Q1 GDP growth would be revised up to 0.3%. It predicted Q2 growth of 0.4%.
--- Written by Martin Essex, Analyst and Editor
To contact Martin, email him at martin.essex@ig.com
Follow Martin on Twitter @MartinSEssex
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