The Bank of England (BoE) has come out with its much anticipated “Super Thursday” press release. In the interests of transparency, the Bank has released a tranche of information, including the Monetary Policy Committee’s (MPC) rate decision, the voting count, minutes, inflation report and updated economic forecasts.
Investor sentiment was high leading up to the announcement, with a majority of traders opting to buy GBP. Yet with such a torrent of information, market volatility was to be expected.
Following the announcement, a dampened inflation outlook saw the sterling fall from 1.5600 against the dollar over 100 pips to below 1.5500, whilst it moved lower against the euro with EUR/GBP declining to the 0.7000 level.
In terms of the anticipated rates hike, there was not much of a surprise. On the back of weak inflation data, the MPC voted by a majority of 8-1 to maintain the Bank Rate at 0.5%.
The MPC voted by a majority of 8-1 to maintain the Bank Rate at 0.5%.
A dovish tone certainly dominated. The statement emphasised that the decision to raise the Bank Rate would proceed cautiously given the fragile gains of the economy.
This is somewhat in contrast to Governor Carney’s hawkish comments at a recent Inflation Report Hearings, held on Tuesday, July 14, in which he stated, “The point at which interest rates may begin to rise is moving closer given the performance of the economy.”
Amongst the deluge of data was the fact that only one MPC member dissented –Ian McCafferty broke ranks and voted for a rate rise. This being the first time this year that the MPC vote was not unanimous.
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However, given that there was just one lone dissenter, a rate hike this year is unlikely, while a probable rate rise remains on the horizon for early 2016
Commenting on the MPC decision, John Longworth, Director General of the British Chambers of Commerce, stated: “The MPC has shown composure and sound judgement in keeping rates unchanged. It would have been imprudent to push through a rate rise at this moment when our economic recovery remains in need of care and encouragement. Rates will eventually have to rise and when they do it should be done slowly and steadily.”
Of particular concern to the Bank was inflation, which dampened the tone vis-à-vis previous statements. Indeed, inflation fell back to zero in June, with low energy and oil prices being the key contributor, while domestic growth and unit labour costs remain weak.
The announcement stated, “The combined weakness in domestic costs and imported goods prices is evident in subdued core inflation, which on most measures is currently around 1%.”
Accordingly, the Committee revised its judgement regarding when the inflation target of 2% would be met, pushing it back to a two-year policy horizon.
When the Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.
A number of positive indicators were mentioned in favour of future hikes, including the fact that household spending is up on the back of low food and energy prices, while productivity, business confidence and wage growth remain strong.
However, the strong sterling of late, low levels of inflation, risks in the global economy and the UK’s current account deficit led the Bank to stress caution, noting, “When the Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.”