During its first meeting held after the historical rate cut in August, the Bank of England’s Monetary Policy Committee (MPC) maintained the status quo and left its key policy rates unchanged at 0.25%. The central bank also continued its asset purchase programme of GBP 60 billion of government bonds, taking the overall purchases to GBP 435 billion. The Bank also elected to continue with purchases of corporate bonds up to GBP 10 billion.
Trends in Forex Markets
In forex markets, the initial impact of the package announced in August has been quite encouraging. Many economic indicators have improved from their low levels that were seen after the UK’s referendum decision to leave the European Union, and the BoE’s internal estimates point toward GDP growth of 0.2-0.3% for the July to September period. Although this is low, it is still better than its August forecast of 0.1% growth, as the consumption sector has seen a strong recovery and there has been a steady development in asset prices as well.
However, the figures are not so encouraging on the inflation front. The one-year consumer price index showed 0.6% last month, which was lower than the consensus estimates. The Bank of England has set an inflation target of 2% (similar to the targets of European Central Bank), and it expects to achieve the same in the first half of 2017. Meeting the inflation target of 2% is one of the key objectives of the Bank of England as this is viewed as essential to sustaining growth and employment in the region.
Critical Reports Ahead
When we are looking at whether the BoE will be forced to lower interest rates, it should be noted that UK (and particularly London) is considered as a global financial hub — as it has a financial system which has an asset size approximately ten times GDP. From the BoE’s perspective, it is vital to keep the UK Financial hub as strong as ever — not just for the domestic economy but for the global economy’s well-being as well.
So it will be interesting to see if the Bank of England cuts the rates at its next policy meeting scheduled on 3rd of November. The monetary policy committee has already indicated its willingness to do so at the September meeting, so forex traders will continue to watch these key data points in determining where policy is headed next.
Before this, we will see the added data point of the quarterly inflation report, which is something that the BoE will be forced to address at the November meeting. This will be released on the 3rd of November, so those with established positions in currency pairs like the GBP/USD and the GBP/JPY will likely need to prepare for enhanced volatility as we head into the release.
By easyMarkets