The Bank of England (BoE) stands apart from the crowd of major central banks by its lack of verbal intervention. Thursday’s release of the central bank’s quarterly inflation report will give further insight into the Old Lady’s view on growth and inflation as Governor Mark Carney faces questions from reporters. Inflation is forecast to be lower, but the current price of oil has boosted growth expectations as consumers have more to spend.
The political risk surrounding the upcoming general elections has forced the central bank to delay any major monetary policy initiatives until all the ballots are counted. The U.K.’s closest election in decades could bring about the country’s exit from the European Union. The BoE would have to address the economic consequences of that maneuver should it come to pass.
The bank’s Monetary Policy Committee voted unanimously 9–0 to keep rates on hold last month. That was a change from a previous 7–2 split that highlights the pessimistic mood within the central bank regarding the growth and inflation expectations needed for the start of a tightening cycle.
The European Commission lowered its U.K. growth forecast from 2.7% to 2.6% after upgrading its expectations for most of Europe. While the majority of the Commission’s growth forecasts are positive, the biggest question mark is British productivity as industrial output continues to fall even as manufacturing turns a corner.
The pound recorded seven-year highs versus the euro and rate divergence expectations will be impacted by the statements in the inflation report. Carney’s words concerning what to expect over the next two years from U.K. data could signal the bank’s intentions. Regardless of what the BoE does, the European Central Bank will continue on its easing path for the foreseeable future, making the rate gap increase a question of when, not if, and the market will price accordingly.
The GBP/USD has proved resilient as the U.S. Federal Reserve has regained the lead in the rate hike race after a positive nonfarm payrolls report last week. The pound is holding the 1.52 line and a higher-than-forecast reduction of inflation expectations could push the GBP below that level.
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