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CURRENCY ANALYSIS

GBP Sterling

GBP Sterling, BoE, forecasts, GBP, Sterling, British pound,currency watch, analysis, currencyfx trader, forex

20 May 2016

As expected, at the 12 May’s MPC meeting the BoE left interest rates unchanged at 0.50%, and revised down growth forecasts in its Inflation Report. Sterling, however, was not affected. In fact, it temporarily strengthened, only to subsequently pull back towards its starting point.

The fact that the pound did not drop may be explained by the BoE’s assessment of the macro scenario, which was not pessimistic. In fact:

● The decision to leave rates unchanged was taken unanimously, clearing doubts, albeit limited, that one or two doves may have voted for a pre-emptive slackening of monetary policy;

 The downside revision of growth forecasts was only marginal (Fig. A): from 2.2% to 2.0% this year, from 2.3% to 2.2% the next, and from 2.4% to 2.2% in 2018;

● The revision of inflation projections was even more limited (Fig. B), and in fact the forecast for this year was raised slightly, from 0.8% to 0.9%. The estimate for next year was lowered from 1.9% to 1.8%, whereas the forecast for 2018 was left unchanged at 2.2% (slightly above the 2% target);

● The BoE stressed that the growth and inflation scenario is based on the assumption that the United Kingdom will stay in the EU, adding that it will abstain from drawing up an alternative scenario, as this is not part of its mandate. With respect to monetary policy management, the BoE will decide on the most appropriate course of action only once the outcome of the referendum is known;

Under the assumption that the United Kingdom stays in the EU, the BoE continues to believe that the next move on rates, on the forecasting horizon (two/three years) will be a hike.

A GBP Sterling, BoE, forecasts, GBP, Sterling, British pound,currency watch, analysis, currencyfx trader, forexB GBP Sterling, BoE, forecasts, GBP, Sterling, British pound,currency watch, analysis, currencyfx trader, forex

Source: Intesa Sanpaolo elaborations on data from Bank of England and Thomson Reuters-Datastream

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