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UK: BoE is back to centre ground again – ING

FXStreet (Delhi) – James Knightley, Senior Economist at ING, suggests that the ECB’s less aggressive actions last Thursday and sterling’s response means the BoE can move back to the centre ground again.

Key Quotes

“After taking a more hawkish line in the summer, the BoE has swung back in the opposite direction in the past couple of months. We suspect that this largely reflects weakness in manufacturing data and concern that rising UK interest rate hike expectations and the belief that the ECB would take more aggressive stimulus action would see sterling surge. This would further harm international competitiveness and lower import price inflation, making it less likely that inflation would move back in line with target in two years’ time. Indeed, the BoE suggested last month that “more likely than not inflation would remain below 1% into the second half of 2016” and that the effects of sterling strength and weakness in energy prices would “diminish only gradually”.”

“However, the less aggressive than anticipated response from the ECB last Thursday has helped contribute to a 2% decline is sterling’s trade-weighted index, of which the euro accounts for nearly half.”

“Furthermore, with the Federal Reserve set to raise interest rates on 16 December and BoE rhetoric successfully de-linking the UK-US synchronised rate hike story, we are becoming a little less upbeat on sterling’s prospects. This is especially the case when you add in the uncertainty and economic risks from the UK’s referendum on ongoing EU membership, which we think will happen late next year.”

“Nonetheless, the domestic economic story remains strong. 177k jobs were created in the three months to September, unemployment is down to 5.3%, wages are rising, confidence is high, house prices are rising rapidly and the service and retail sectors are in good health.”

“Consequently, we still feel that the Bank of England is gradually edging towards a rate rise, but is doing all it can to prevent a rapid rise in sterling. Our house view remains that the next move in interest rates will be in May 2016, but that no-one will join Ian McCafferty in voting for an immediate rate rise this Thursday.”

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