BOE on the U.K.: Things Are Looking Better

Is the worst behind the U.K. now? Is it finally approaching the light at the end of tunnel? Based on Mervyn King’s statement, the Bank of England thinks it is!

In the most recently held inflation report news conference, BOE Governor Mervyn King gave the markets a bit of rare optimism. King said that the BOE has upgraded its growth estimate for 2013 to 1.2% from 0.9%. Since the onset of the 2007 financial crisis, this is the first time that the BOE has revised its forecast to the upside.

In addition, its inflation forecasts were changed for the better, suggesting that the central bank should be able to keep its stimulus measures in place. The BOE now believes that it will achieve its 2% inflation target as soon as Q3 2015, instead of Q1 2016.

The upbeat statement from King comes in the wake of a recent wave of positive economic feedback on the U.K. economy. If you recall, the most recent GDP report was considerably stronger than expected due to the improvements across the manufacturing, services, and construction industries.

The U.K.’s job market also shares the same encouraging story, as evidenced by the unexpected drop in unemployment from 7.9% to 7.8%. This underlying strength in the economy might explain why the British pound has been relatively more resilient against the U.S. dollar than most currencies.

Of course, these positive economic developments didn’t go unnoticed… not under the watchful eye of the BOE! Mervyn King made it a point to inform the public of these in the inflation report.

According to the central bank, domestic demand saw moderate growth in 2012 thanks to higher household incomes which translated to stronger consumer spending. Meanwhile, energy companies weren’t shy about spending and loaded up on investments, which helped offset lower expenditures in other industries.

The central bank also made it a point to pat its own back, claiming that its programs have helped stabilize credit markets. Borrowing costs are low across the boards and funding has become more accessible to companies and households. And with the Funding for Lending Scheme in place, the BOE believes that it will remain this way until early in 2015.

But naturally, it wasn’t all good news – King also made it a point to discuss some risks to the economy. It noted a significant drop in exports because of weaker global demand. In fact, I sensed a hint of concern in King’s voice as he talked about the threats stemming from the continued contraction in the euro zone. He even went so far as saying that the U.K. is “very much dependent on what happens in the rest of the world, including what happens in the euro area.”

Mervyn’s Last

One thing to keep in mind about the recent inflation report is that it was Mervyn King’s last. After serving the central bank for over 20 years, he will finally step down in July to make way for Mark Carney.

Carney is a known dove and some say he may introduce additional QE when he takes over. But keep in mind that King hasn’t exactly been hawkish either. In fact, he has unsuccessfully been pushing for more QE in the past few BOE meetings, so one can’t help but wonder if Carney will have any better luck convincing other policymakers to ease monetary policy further.