#1: Growth and inflation forecasts were cut
Mervyn King announced the central bank’s decision to downgrade its medium-term growth forecast to an annual rate of 2% for the next two years after initially predicting a 2.67% annual growth back in May.
Apparently, the government’s spending cuts and the euro zone debt crisis are taking a much bigger toll on the economy than the BOE had previously noted.
The central bank isn’t too worried about the recent GDP report which came in at -0.7% though. They think that certain one-time factors such as the unusually rainy weather and a couple of extra holidays might have exaggerated the recent underperformance of the economy.
Inflation estimates were also revised down. After peaking at 5.2% in September last year, the BOE now expects the inflation rate to steady at around 2.1% in the last quarter of 2012 and around 2.0% in 2013.
#2: The BOE is optimistic on its new Funding for Lending (FFL) scheme
As I had mentioned before, the BOE has been doing as much as it can to avoid interest rate cuts and asset purchases in boosting the economy.
Now it looks like the BOE has found a temporary solution to its dilemma through its new funding for lending (FFL) scheme. For the newbies out there, the FFL simply gives the U.K.’s banks the right to swap collaterals like existing loans in exchange for Treasury bills with low interest rates.
Under the FFL, the banks would be able to access 1 GBP worth of cheap funds for every 1 GBP it lends to consumers and businesses. As you might have noticed, the aim of the program is to boost bank lending and stimulate economic activity. And judging by the way that consumer banks are dropping their loan rates, the BOE has every right to be optimistic.
#3: More easing ahead, but not in the form of rate cuts
BOE Governor Mervyn King had pound bulls going gaga like girls going loco for Olympic swimmer Ryan Lochte when he said that further interest rate cuts would be counter-productive. Of course, market junkies took that as a sign that the central bank’s official cash rate would remain at its current all-time low of 0.5% for some time.
However, don’t think that Mervyn King and his men will just sit on their hands and leave the British economy to its fate. He promised that the BOE will “do all it can” to spur growth which would probably come in the form of more quantitative easing.
Although the central bank had already raised its asset-purchase program by 50 billion GBP last month, upping its total purchases to 375 billion GBP, King said that the bank has still not done enough QE.
But don’t hold your breath! Analysts think that we won’t see any increase in the program until November after the bank’s asset purchase program has been completed.
Consequently, the pound rallied against most of its counterparts as traders cut back on their bets on more BOE rate cuts. GBP/USD was up almost 100 pips following the release of the central bank’s inflation report and press conference at 1.5672.
In this not-so-old man’s opinion, yesterday’s press conference implies that the bank is back to its wait-and-see approach as they wait for developments to unfold in the euro zone. This makes me wonder how long the bullish effect of King’s speech would last on the pound.
After all, it’s not like the BOE has shed its dovish feathers for hawkish ones. Instead, it’s probably still looking to implement more quantitative easing which in the past has had a bearish effect on the currency.
What do you think?