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Forex Flash: UK Contorting to flexible targeting - Nomura

FXstreet.com (Barcelona) - Nomura economists note that the UK is starting to twist and contort towards flexible targeting.

They comment that an interventionist desire to deliver further stimulus has provoked a debate about a change to the BoE remit, which may be answered in the Budget, but need not be. They ultimately are expecting greater flexibility in the time to return inflation to target (60%), but the letter-writing bounds could become target bands (10%). They write, “No change now seems unlikely (25%), albeit more likely than nominal GDP growth (4%) and level (1%) targets, in our view. Greater flexibility need not cause huge initial moves as it takes what is now de facto and makes it de jure. Nevertheless, the signalling effect could see additional inflation premium applied to the curve over time. Any other more significant change will see much greater inflation premium added to the curve, as we do not sense this has yet been priced but a clear statement of no remit change should see breakevens retrace. Applying the likely market moves to the probabilities leaves us with long 5f5y inflation as our preferred trade.”

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