Week in FX Europe – BoE Shifting The Goal Posts?

Shifting the BoE job threshold of +7% seems to have already begun. It started this week following the UK inflation report and has since been backed by BoE member Weale. He is the only policymaker to vote against the terms of the Bank’s forward guidance plan launched in the summer. He has indicated that it’s very possible that the “Old Lady” may keep their benchmark-lending rate at +0.5% even when unemployment happens to fall below the current desired threshold.

Like any other Central Bank, the BoE cannot ignore increases in inflation expectations, which in the UK have picked up. British policy makers may need to raise interest rates before all spare capacity in the economy is actually used up. Inflation in the UK has been running above the Bank’s desired target of +2% for many years. Why? This has occurred mostly on the back of policymakers concentrating on getting the UK economy kick started by any means possible. They have been doing the same as Fed and the BoJ, applying quantitative easing- slashing interest rates and buying government bonds – keeping cash cheap and plentiful.

Last month inflation in the UK happened to fall sharply to +2.2%, which has allowed the BoE to revise down its future forecasts this week for CPI. As it tries to support Britain’s economic recovery, the BoE will only consider raising interest rates from their record low of +0.5% once unemployment falls below +7% threshold. This percentage level was chosen as a “simple” measure for the public, so they could understand. However, the timing of raising rates is still an unknown entity.

Everything is still data dependent and the market is currently speculating on a 2015 rate move. BoE policy makers could easily shift the +7% threshold lower if Governor Carney and company does not believe a rate hike is warranted. UK monthly employment numbers will continue to be keenly watched.


WEEK AHEAD

* EUR German ZEW Survey (Economic Sentiment)
* USD Advance Retail Sales
* USD Consumer Price Index
* USD Fed Releases FOMC Minutes
* JPY Bank of Japan Rate Decision
* CAD Consumer Price Index

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell