Ho hum! As expected, the BOE decided to keep interest rates on hold and asset purchases unchanged in their latest policy statement. In addition, BOE Governor Carney’s tone suggested that the U.K. central bank isn’t likely to hike rates anytime this year. Here are some reasons why:
1. Downbeat inflation outlook
As with most central banks these days, the main concern of the BOE is that of weakening inflationary pressures. The tumble in oil prices has been the main culprit for this, dragging U.K. CPI to just 1% in November – its lowest level in more than a decade.
And it doesn’t end there! Carney projected that annual inflation is likely to fall below 1% in the near term, as falling energy prices could wind up dragging the CPI much lower. Furthermore, a weak inflation outlook could lead consumers to hold back their spending in anticipation of lower price levels later on, eventually taking its toll on growth.
2. Euro zone growth concerns
While a downturn in the domestic economy doesn’t seem to be an immediate concern, external growth risks are starting to bother BOE Governor Carney and his men. In particular, the ongoing slowdown in the euro zone is keeping the BOE cautious since the region is the U.K.’s largest trading partner.
Even though the region has managed to stay out of a recession for now, ECB and BOE officials fear that negative growth combined with negative inflation is still a possibility. With that, U.K. central bankers are anticipating lower demand from the euro zone and potentially weaker export and production numbers from their own economy in the coming months.
3. General elections in May
Remember when BOE Governor Carney announced that they are likely to hike rates before the U.K. general elections this year? Nope, ain’t gonna happen!
In fact, BOE officials are likely to hold off any major monetary policy changes ahead of a possible change in the political scene. For now, early polls aren’t showing a clear winner, which suggests that another coalition government might be formed and make matters more complicated for the BOE down the line. If so, the odds of seeing policy adjustments from the BOE might even be lower throughout the year.
Do you think this means further weakness for the British pound in 2015? Or can it still retain its edge against some of its other forex counterparts?