As expected, the Bank of England (BOE) kept monetary policy unchanged for the meantime, maintaining asset purchases at 375 billion GBP and interest rates at 0.50%. After all, the latest round of data showed a slowdown in industry performance and reduced inflationary pressures.
A quick look at the economic releases from the U.K. last week reveals that the PMI readings for the manufacturing, services, and construction sectors all came in short of expectations and reflected weaker industry expansion for March. Since these are major components of overall economic growth, analysts predict that the U.K. might print a bleak GDP figure for the first quarter of the year. On top of that, annual CPI is standing at a 4-year low of 1.7%, a few notches below the central bank’s 2% target.
However, fans of the British royal baby – Oops, I meant the British POUND – are still hopeful that the BOE will hike interest rates sooner or later. After all, as BOE Governor Carney hinted in his recent testimony, the U.K. central bank might increase the benchmark rate before the general elections take place. But that’s not until May 2015!
Some say that tightening will be delayed because of the slack in the economy, but others believe that it might take place sooner rather than later. For one, the IMF recently upgraded its GDP forecast for the U.K. economy, citing that it could grow by 2.9% this year – the fastest pace among the G7 nations. Aside from that, the BOE might be keen to reduce upward pressures on house prices, as keeping rates too low for too long might result to asset price bubbles.
Under its forward guidance, the BOE has specified that it will start considering hiking rates only when the jobless rate falls below the 7% threshold. However, Carney has emphasized that reaching this target is not an automatic trigger for a rate increase. Who knows if the BOE might take a page off the Fed’s book and scrap the unemployment rate threshold altogether?
For this week’s monetary policy statement though, Carney and his men were unable to hold a press conference and let the markets in on their assessment and outlook for the U.K. economy. In fact, their actual monetary policy meeting was cut short by a day since BOE MPC members had to wrap things up quickly in order to attend the IMF meetings in Washington this week.
For now, it’s still a wait-and-see for forex traders, as GBP/USD is currently testing key resistance levels. Upcoming U.K. data will continue to have a strong effect on pound movement in the coming weeks, as these could support or negate Carney’s rate hike bias. Remarks from other BOE officials, particularly the MPC voting members, will also make an impact on the pound’s direction.
As I mentioned in my BOE Rate Decision Trading Guide, traders will have to wait for the release of the MPC meeting minutes to get a clearer idea of the BOE’s monetary policy bias. If it turns out to be anything like the latest FOMC minutes wherein several policymakers didn’t agree with the central bank head’s rate forecast, the pound might wind up returning most of its recent gains!
When do you predict the BOE will hike interest rates? Cast your votes in our poll below or share your thoughts in our comment box!