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The BoE opts for a downward revision of inflation; maintains economy in healthy state

FXStreet (Mumbai) - Super Thursday’s outcome was very much in tune with market expectations. The Bank of England, as expected, left the rate unchanged. Again, as expected, only MCCafferty voted in favour of raising rates from a record-low of 0.5 per cent. The vote to hold rates was thus 8-1.

The BoE’s November Inflation Report and minutes seemed rather dovish on the surface as it pointed to a lower growth and inflation forecasts in the near-term.

However, upon delving deeper the more hawkish undertone cannot be missed. BoE chief Carney repeatedly mentioned the lower yield concerns during the press conference that followed the meeting. Also, the 2018 inflation forecast was revised up to 2.2%.

Healthy state of economy projected

The BoE cut global demand growth and inflation forecasts over the coming year, stating that headline inflation is expected to remain below 1% y/y until the second quarter of 2016. Expectation of a lower natural gas and clothing & footwear prices and persistent downward pressure from lower imported goods prices led to the downward revision, while unit labour costs are expected to rise. As wage growth remains strong and productivity growth stays below trend, domestic costs can be expected to rise thereby pushing inflation towards target.

Global growth prospects were revised downward. The domestic economy was however viewed to be in a relatively healthy shape. Slack is estimated to be at about 1/2 per cent of GDP. Despite slower growth in export sectors, the slack is expected to work itself off.

Inflation revised downward

Near-term growth and inflation were also revised downward underlining the hawkish stance. The 3-year inflation forecast was revised up from 2.1% to 2.2% y/y, the highest it’s been in 10 years. What came across strongly from the report and minutes was that the MPC considers the current level of the yield curve as too low. Carney stressed on the fact that the MPC does not endorse the market’s view of interest rates. It was clear that the policy making body wanted to avoid an inflation overshoot at all cost.

Sterling hit

Post the release of the BoE inflation report and minutes the sterling hit a one-week low against the dollar as the central bank gave no sign of an immediate rate hike and predicted that the present near-zero inflation will pick up rather slowly. The BoE looks now poised to keep rates unchanged till second or the third quarter of 2016.

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