Bank of England Governor Carney seems to have taken the saying “Every dark cloud has a silver lining” to heart, as he stayed relatively upbeat during the Inflation Report hearings this week. Here are a few takeaways from the event:
1. U.K. could see negative inflation figures
As discussed in the BOE’s recent policy statements, the U.K. economy could be in for much weaker inflationary pressures in the coming months due mostly to the slump in oil prices. Central bank officials projected that inflation could stay flat throughout most of this year, with the possibility of indicating deflation for a few months.
Governor Carney also mentioned that annual inflation isn’t likely to hit their 2% goal until 2017, as falling consumer price levels might soon dampen wage inflation.
2. Carney says deflation can be good
Interestingly enough, Carney suggested that deflation might actually be good for the U.K. economy since this would encourage more spending. He clarified that there has been no sign of negative effects from weak inflation yet, which usually involves consumers delaying their purchases in anticipation of much lower prices later on.
U.K. Chancellor Osborne agreed with Carney’s view in saying that the downturn in inflation was caused by external factors and that lower energy and food prices have actually been welcome news for households. He added that this must not be confused by the threat of persistently low inflation.
3. BOE is ready to cut interest rates if needed
Even with his glass-half-full economic outlook, Carney still admitted that the BOE will be ready to cut interest rates if necessary. In particular, Carney noted that 0.5% might no longer be a floor for interest rates once the downturn in inflation lasts for more than a year and eventually translates to lower domestic demand and wages.
4. Carney says next move is still likely to be a hike
Before forex market participants could interpret their openness to a rate cut as a dovish signal, Carney assured that their next monetary policy move is still likely to be a rate hike. In fact, he even upgraded growth forecasts for the next couple of years!
According to their official statement, the monetary policy committee judges that economic slack will soon be absorbed, as lower price levels actually boosted real incomes and supported the already robust domestic growth. “The MPC judges it more likely than not that bank rate will increase over the forecast period,” it added.
Do you think the BOE’s optimistic stance is justified or are they just putting on a brave front? If so, how might this impact the pound’s forex trends? Don’t be shy to share your opinions in our comments section!