What did the Bank of England (BOE) officials say that got pound bulls charging across the forex charts? While there’s no denying that Guv’nah Mark Carney is typically a glass-half-full kinda guy even during his stint at the Bank of Canada (BOC), it does look like his optimism has also rubbed off on his fellow policymakers. Here’s a rundown of the major points made during the BOE statement and meeting.
1. Not too worried about China
Forex junkies had been buzzing about how the downturn in China might be a game changer for most central banks, possibly leading some to shift to a more dovish bias. Not surprisingly, the latest rate statements from the ECB, BOC and RBNZ highlighted concerns about the possible drag that China could put on the global economy and commodity prices.
In contrast, the folks over at the BOE said the U.K. economy doesn’t seem to have been materially affected by the equity selloff in China and the turmoil it caused on global financial markets. Even though policymakers acknowledged that this phenomenon is likely to have repercussions on commodities and emerging markets, they reiterated that it is unlikely to derail the BOE from the rate hike track.
Based on a report released by the U.K. Office for National Statistics, exports to China account for only 4.8% of total shipments from the U.K. while imports from China comprise 8.7% of all the goods and services bought as of last year. As it turns out, Brits have much stronger trade ties to the rest of Europe and to the U.S., which explains why the BOE ain’t all hot and bothered about China.
“Although the downside risks emanating from overseas had risen, it would be premature to draw strong inferences from this month’s events for the likely path of activity,” the MPC minutes indicated. “While these developments have the potential to add to the global headwinds to U.K. growth and inflation, they must be weighed against the prospects for a continued healthy domestic expansion.”
2. Upbeat inflation outlook
With that, BOE policymakers retained their upbeat inflation outlook, projecting that the annual CPI could rise to around 1% by early 2016. Even though oil prices turned lower last month, committee members maintained that there may still be upside risks to inflation thanks to the pound’s slight depreciation in August.
A quick review of the latest U.K. inflation reports shows that the headline CPI beat forecasts of a flat reading and showed a 0.1% year-over-year increase in July. The core version of the report was also better than expected at 1.2% versus the estimated 0.8% reading. MPC members noted that their near-term outlook for inflation was unchanged but that the volatility in commodity prices and potential forex fluctuations add some uncertainties to the mix.
3. Mixed view on labor market
When it comes to their labor market assessment, BOE policymakers no longer seemed to be as upbeat as they used to be. After all, the claimant count change report has been churning out weaker than expected figures from March to June, printing a meager 4.9K increase in hiring for July. Prior to this, the U.K. had been seeing more than 20K in monthly employment gains since June 2013.
Policymakers mentioned that jobs growth may have already leveled off, suggesting that firms’ demand for labor has weakened. On one hand, this could spur a pickup in productivity and potentially faster wage growth. On the other hand, this might be reflective of hiring difficulties and skills shortages.
4. Only one dissenter
As expected, only Ian McCafferty voted to increase interest rates this time, citing the upside risks to inflation as sufficient reason for an immediate rate hike. The rest of the members noted that there are still plenty of uncertainties when it comes to price levels, wage growth, and the pound’s forex trends so they decided to sit on their hands for now. When it comes to asset purchases, the committee voted unanimously to keep ’em unchanged at 375 billion GBP.
The pound’s forex reaction to all this was generally positive, as the British currency managed to advance against the dollar, yen, euro and commodity currencies after the BOE events. Stable U.K. fundamentals seem to suggest that the pound can be able to hold on to its recent forex gains since the British economy is faring better than most of its peers and isn’t too exposed to the slowing Chinese market. Besides, only the BOE and the Fed are in the rate hike race while other major central banks have set up their tents in the dovish camp.