BOE Remains on the Cautious Side

Once again, the old chaps over at the Bank of England decided to stay put and not make any significant changes to its monetary policy. As expected, the Monetary Policy Committee voted to keep interest rates unchanged at 0.50%, while monthly bond purchases will remain steady at 375 billion GBP.

Apparently, the MPC is very concerned about inflation, which has remained near the top of the central bank’s target inflation rate of 1-3%. Remember, the more “loose” a central bank’s monetary policy, the bigger the chance that the economy will “heat up” and lead to a more rapid increase in consumer prices.

On a more positive note though, recent data has actually been quite positive, so it is conceivable that the BOE took that into consideration at this latest meeting. Retail sales growth in February clocked in at 2.1%, which was a great turnaround from the 0.7% decline we saw the month before.

Moreover, this week’s release of purchasing manager indexes all showed improvements from the month before. The construction PMI rose from 46.8 to 47.2, while the manufacturing PMI improved from 47.9 to 48.3. Meanwhile, the services PMI stayed above the line-in-the-sand 50.0 mark, as it increased from 51.8 to 52.4.

Given the committee’s decision to stay put and all these small improvements in the PMIs, it’s no wonder GBP/USD appears to be bucking its 2013 downtrend.

GBP/USD Daily Chart

The next major report we should all watch out for will be the MPC meeting minutes. Chances are though, it will most likely reveal that nobody jumped ship and joined incumbent Governor Mervyn King in the dove camp. Remember, the last two meetings have showed that King is leaning towards more asset purchases, but was outvoted 6-3 both times.

Moreover, I don’t think we’ll see any changes from the central bank until Mark Carney takes over the top spot at the BOE this coming June.

Keep in mind that Chancellor George Osborne recently gave the BOE more allowance to maintain an inflation rate above 2.0% as long as it helps boost the economy. I think that with this additional leeway, policymakers may be thinking that it would be best to give Carney a clean slate so that he can more effectively implement his own policies. For all we know, he might just start his reign with a bang, just like what BOJ Governor Kuroda did earlier this week!