BOE Kristin Forbes Raises Prospect of Rate Hike

A senior Bank of England official has raised the prospect of interest rates rising sooner than expected if economists are proved wrong about the power of a strong pound to hold down inflation.

Kristin Forbes, one of the nine rate-setting members of the Bank’s monetary policy committee, questioned whether current economic models were accurately reflecting the relationship, or “pass-through”, between exchange rates and the outlook for inflation. That, in turn, had important implications for monetary policy, she said in a speech.

“This limited understanding of how exchange rate movements affect inflation is – to be candid – quite frustrating for those of us tasked to set monetary policy. This is a crucial relationship – especially for an open economy such as the UK,” Forbes told the Money Macroeconomics and Finance research group conference in Cardiff.

The stronger pound has cut the price of UK imports and is seen as a key factor in keeping inflation hovering around zero in recent months. With inflation well below the Bank’s government-set target of 2%, financial markets are not expecting interest rates to rise until next year

via The Guardian

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza