If you’re trading the British pound and wondering what’s next for its forex trends, better read up on these takeaways from the Bank of England’s Inflation Report. This economic release, which is printed on a quarterly basis, provides additional insight on the central bank’s economic assessment and outlook. It’s also accompanied by a testimony from the BOE head honcho himself so this tends to have a lasting impact on pound price action.
1. No interest rate hikes this year
In contrast to the BOE’s previous statements indicating that an interest rate hike is likely to take place sooner than most forex market watchers expect, this week’s Inflation Report revealed that central bank officials are likely to wait much longer before tightening monetary policy. Now that’s a pretty significant shift in Governor Carney’s bias since he used to be so upbeat about the U.K. economy, insisting on his glass-half-full view that the downturn in inflation would translate to stronger consumer spending later on.
According to MPC members, any potential interest rate increases would be done gradually, given the persistence of the headwinds facing the U.K. economy these days. They added that additional uncertainties could keep the benchmark rate below the average historical levels for some time.
2. Downbeat economic forecasts
To emphasize their shift to a less hawkish stance, MPC members also lowered their growth forecasts for this year and for the next couple of years. From a previous estimate of 2.9% GDP growth in 2015, policymakers downgraded it to just 2.5%, which is closer in line to what most market analysts projected.
In addition, the BOE also cut its forecasts for exports, business investment, and household spending. Carney added that growth prospects could weaken further if the Greek debt crisis worsens, as this could spark debt contagion in the euro zone, which is its closest and largest trade partner.
As for inflation, BOE Governor Carney repeated that annual CPI is likely to turn negative for a few months before recovering and eventually moving back to its 2% target. BOE officials lowered their 2016 inflation forecast from 1.8% to 1.6% but surprisingly upgraded their CPI projections for this year from 0.5% to 0.6%.
3. GBP strength is hurting inflation
On a more positive note, BOE officials maintained that there is no need to worry about the U.K. slipping into a deflationary cycle just yet. However, they also added that they could be ready to step up asset purchases or cut interest rates if that happens.
While policymakers are hopeful that the negative impact of commodity price slides on overall inflation would soon fade, they also noted that the pound’s appreciation is putting downward pressure on price levels. After all, a strengthening local currency makes imported goods cheaper and forces local businesses to lower their prices in an effort to stay competitive.
4. Slow growth in wages and productivity
Another factor that’s keeping a lid on inflation is the slow growth in wages, as the rise in part-time and poor-quality jobs has kept average earnings low. With businesses able to cut back on workers’ pay, they can be able to stay profitable without increasing the prices of goods or services they provide. From the workers’ standpoint, without any foreseeable increase in wages, there is very little incentive to put in more productive hours.
With that, the BOE also downgraded wage growth estimates, with policymakers predicting that average earnings would rise by only 2.5% by the end of the year instead of their previous estimate of a 3.5% increase.
In a nutshell, the latest BOE Inflation Report turned out to be a buzzkill for forex traders’ rate hike expectations, as bleak growth and inflation forecasts support the central bank’s decision to stay cautious. Do you think this would force the pound to return its recent gains?