In case you were too busy pricing in the Fed’s latest monetary policy changes, you should know that the Bank of England (BOE) has also rolled out its December policy statement.
What did the central bank have to say? More importantly, how had its statement affected the pound’s price action?
Here are 4 points you need to know.
No policy changes
In unanimous 9-0 votes, the BOE’s Monetary Policy Committee (MPC) decided to keep its current monetary policies steady for another month.
This means that the bank rate will remain at a record low of 0.25%, government bond purchases will be capped at £435B, and the Term Funding Scheme (TFS) that’s allotted for U.K.’s corporate bonds will stay at £10B.
If you recall, back in August the central bank cut its rates for the first time since 2009; extended its QE program, and introduced the TFS back in August to keep markets calm after Britain has voted out of the EU.
Eyes on the price
BOE head honcho Mark Carney and his gang spent some time discussing the changes to their inflation expectations. They started with a throwback of their November estimates, which considered the pound’s post-Brexit weakness and put CPI at 2.75% by 2018 before gradually going back down to 2.50%.
But the pound has fallen by approximately 6% since last month and now the BOE is making adjustments. Members now believe that the pound’s appreciation would “result in a slightly lower path for inflation than envisaged in the November Inflation Report,” though it will still likely overshoot CPI targets in 2017 and 2018.
For now, the game plan is to wait it out and let inflation overshoot its targets. See, the central bank believes that “Sterling’s effect on CPI inflation will ultimately prove temporary and fully offsetting it would require exerting further downward pressure on domestic costs, including wages, and would therefore involve lost output and higher unemployment.”
In short, economic risks would be higher if the BOE chooses to intervene. This is why they’ve decided to look beyond the short-term to “set policy so that inflation returns to its target over a longer period than the usual 18-24 months.”
Still, the BOE warns that “there are limits to the extent to which above-target inflation can be tolerated.” Specifically, they’ll look into the cause of the overshoot and the extent of their second-round effects on domestic costs, the evolution of inflation expectations, and the scale of the shortfall in economic activity.
Economy is growing but…
The BOE acknowledged that economic activity is growing at a moderate pace thanks to “solid” consumption growth. However, Carney and his team also pointed out that other indicators are showing moderation.
Industrial production, for starters, dropped sharply in October, while overall investment intentions show that firms are “considerably” less optimistic about the 12 months ahead than they were pre-referendum. In addition, the BOE also believes that improvements in near-term global outlook have been counterbalanced by “more elevated risks.” Taken together, the BOE believes that “a slowing in activity in 2017” remained likely.
BOE maintains its neutral stance
After making it rain in August, the BOE has shifted its bias from being dovish to a more neutral stance. The central bank maintained its stance for another month, saying that
“Monetary policy could respond, in either direction, to changes to the economic outlook as they unfolded to ensure a sustainable return of inflation to the 2% target.”
GBP dropped across the board
The combination of slower inflation acceleration AND growth expectations dragged the pound lower across the board.
GBP/USD dropped by another 104 pips (-0.83%) to 1.2439 from London open to the end of the U.S. session while GBP/JPY fell by 92 pips (-0.62%) to 146.65 and EUR/GBP shot up by 21 pips (+0.25%) to .8382.
For now, it sounds like the BOE is shrugging off the upward pressure of a weak currency on the U.K.’s inflation, believing it to be temporary. It still bears watching though!
High inflation would not mix well with depressed wages and, added with weaker business confidence, could threaten the economy’s major driver that is consumer spending.