Forex News – Bank of England revises guidance and raises UK growth outlook
February 13, 2014 11:14 am
Mark Carney’s press conference and the Bank’s quarterly inflation report were the key events of the week for the pound. They both certainly lived up to expectations as the currency rallied strongly on the back of new forecasts made in the report and Mark Carney’s appearance.
Going into the conference, the key question was what the Bank was going to do about the ‘pleasant’ sort of headache of UK unemployment falling much faster than anticipated. Back in July of 2013, when Mark Carney’s term as Governor of the Bank started, the forward guidance threshold of 7% unemployment was instituted, prior to any interest rate hikes.
As this level was probably breached in January according to the bank’s own forecasts, the Bank would now look at a range of indicators related to spare capacity including business surveys, hours worked and others. This methodology would probably make it much more difficult to predict the bank’s future moves, according to economists. The UK economy was about 1% to 1.5% below potential GDP output, according to the Bank.
However, Carney went to great lengths to reassure that he would keep interest rates ‘lower for longer’ and that the Bank would not risk the economic recovery by hurriedly raising rates. There was also acknowledgement that market predictions contained in short interest rate futures prices; that interest rates would start to rise during the second quarter of 2015, were probably on the mark for now.
Even when interest rates would start to rise, they would likely remain well below the 5% pre-crisis level according to Carney, as there were a number of headwinds for the economy in the post-crisis environment that called for a lower level of interest rates for the foreseeable future. The Bank’s forecasts showed that inflation would likely end below its 2% target at the end of its 3-year horizon.
Since interest rates were likely to remain low for such a long period, why then did the pound rally? Firstly, it was the first time that the Bank acknowledged that predictions of rate rises during the first half of 2015 – and not say, in 2016- were quite plausible. Secondly, the Bank’s forecast for GDP growth was revised substantially higher at 3.2% for 2014 compared to growth of 2.8% predicted as early as November. The Bank’s forecast was higher than that of most private economists.
In a sense therefore, this environment also creates the conditions for rate hikes even faster than what is being predicted right now, provided of course that economic data continue surprising on the upside. This is not the most probable scenario presently, but it’s worth keeping in mind.
There was also not much emphasis on the level of sterling by Carney, a fact which allowed the pound to rise.
In the aftermath of the Carney press conference sterling staged a broad-based rally, taking the UK currency near 3-year highs against the dollar and the euro under the 0.82 pence level against the pound.
Mark Carney’s press conference and the Bank’s quarterly inflation report were the key events of the week for the pound. They both certainly lived up to expectations as the currency rallied strongly on the back of new forecasts made in the report and Mark Carney’s appearance.
Going into the conference, the key question was what the Bank was going to do about the ‘pleasant’ sort of headache of UK unemployment falling much faster than anticipated. Back in July of 2013, when Mark Carney’s term as Governor of the Bank started, the forward guidance threshold of 7% unemployment was instituted, prior to any interest rate hikes.
As this level was probably breached in January according to the bank’s own forecasts, the Bank would now look at a range of indicators related to spare capacity including business surveys, hours worked and others. This methodology would probably make it much more difficult to predict the bank’s future moves, according to economists. The UK economy was about 1% to 1.5% below potential GDP output, according to the Bank.
However, Carney went to great lengths to reassure that he would keep interest rates ‘lower for longer’ and that the Bank would not risk the economic recovery by hurriedly raising rates. There was also acknowledgement that market predictions contained in short interest rate futures prices; that interest rates would start to rise during the second quarter of 2015, were probably on the mark for now.
Even when interest rates would start to rise, they would likely remain well below the 5% pre-crisis level according to Carney, as there were a number of headwinds for the economy in the post-crisis environment that called for a lower level of interest rates for the foreseeable future. The Bank’s forecasts showed that inflation would likely end below its 2% target at the end of its 3-year horizon.
Since interest rates were likely to remain low for such a long period, why then did the pound rally? Firstly, it was the first time that the Bank acknowledged that predictions of rate rises during the first half of 2015 – and not say, in 2016- were quite plausible. Secondly, the Bank’s forecast for GDP growth was revised substantially higher at 3.2% for 2014 compared to growth of 2.8% predicted as early as November. The Bank’s forecast was higher than that of most private economists.
In a sense therefore, this environment also creates the conditions for rate hikes even faster than what is being predicted right now, provided of course that economic data continue surprising on the upside. This is not the most probable scenario presently, but it’s worth keeping in mind.
There was also not much emphasis on the level of sterling by Carney, a fact which allowed the pound to rise.
In the aftermath of the Carney press conference sterling staged a broad-based rally, taking the UK currency near 3-year highs against the dollar and the euro under the 0.82 pence level against the pound.
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