At the August meeting , Bank of England (BoE) decided to keep its key bank rate unchanged (0,25%). The decision, together with the publication of updated economic forecasts caused massive pound sell-of which is now noticeably below 1.3100. 

Only 2 hawks in MPC 

The Bank of England kept its key interest rate unchanged at 0.25%, in line with the broad market consensus. QE program value also did not change and is still at 435 bilion pounds level. Six out of eight Monetary Policy Comittee members voted in favor of maintaining interest rates. McCafferty and Saunders were the only hawks in BoE.

The most important headers from BoE minutes are highlighted below:

  • BoE expects a mild Brexit and a smooth transition
  • TFS to be discontinued end of February 2018
  • MPC’s members are expecting two rather than one hike in the nearest future
  • The depreciation of GBP may have an impact on inflation
  • Household consumption might be higher than May inflation report forecasts
  • All of the MPC’s members agreed that rise in key bank rate should be gradual and limited

Whole document can be seen here.

BoE lowers its forecasts

The main reason for pound sterling’s negative reaction is primarily a downward revision of BoE’s forecasts in the inflation report. CPI projections were revised to 2.58% for 2017t from 2.64% earlier. For the following years index’s forecasts are now 2.19% in 2018 (from 2.22% previously) and 2.22% in 2019 (from 2.26% previously).

Gross domestic product forecast was also revised to 1.7% at the end of 2017 (1.9% projected previously) and to 1.6% from previous 1.7% in 2018. Forecasts for 2019 did not change.

Full report available on the BoE website.

Market reacts immediately

Both the inflation report and the decision on rates triggered a clear depreciation of the GBP against all major currencies. The GBPUSD lost about 70 pips at first, testing the lower limit of the uptrend channel:

Pound also loses in relation to the Euro. EURGBP tested the high from July 21st at 0.8995:

Carney: Brexit is beginning to affect UK’s economy

Half an hour after the BoE monetary decision, Mark Carney began his press conference. The main topic was shifted to Brexit and its impact on the British economy. Main headers from Carney’s speech are listed below:

  • BoE is not certain about Brexit will weigh on growth
  • process of Brexit is beginning to affect UK economy’s supply capacity
  • since Brexit vote last year, investment has suffered
  • weaker consumer spending has dragged on growth
  • global equilibrium interest rate potentially rising
  • he is sure it can take a little longer to bring inflation back to target
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