BoE struggles to explain new caution

BoE struggles to explain new caution

Nuanced or confusing?

The media has rightly focused on policymakers’ confusing, or perhaps to put it more charitably, finely nuanced reasons for keeping the Bank rate at 0.5% and stock of assets unchanged on Thursday. BoE governor Mark Carney certainly had to deploy his most nimble explanatory powers in the press conference that followed. Voting was also the same as at the Monetary Policy Committee’s previous meeting in March. That trained more attention on policymakers’ apparent consensus which seemed so multifaceted.

Not quite neutral

From the market’s point of view, this was not quite a neutral hold. An already fragile sterling against the dollar duly gravitated back near a four-month low set earlier in the week, allowing dollar-calibrated FTSE to call off consolidation of the week’s 1.3% gain, reversing a retreat into the Bank announcement. Sterling reflected the Bank’s trimmed 1-year and 2-year inflation forecasts to 2.13% from 2.28% in February, and 2.03% vs. 2.16% in February, respectively. Carney also said in his prepared statement that the UK economy had not fulfilled conditions for an increase since February. True, MPC members queried a preliminary growth estimate in the first quarter of 0.1%, expecting later assessments to turn out “somewhat stronger”.  Hence on average, their growth forecast stayed at 1.75% per year for the next three years. Regardless, the governor stamped that growth as “weak” on Thursday.

Weak growth

Moreover, the horizon over which the MPC intends to bring inflation back to target has drawn closer.  In this case, that appears to mean less of an imperative to act sooner to hit the target on time, given that slower growth and softer sterling are now expected to help steer price growth to 2% more than foreseen just months ago. As well, despite the UK economy’s “limited degree of slack”, the Bank conveyed much reduced urgency to tighten policy. It qualified faster than expected improvements in the pace of growth and sterling depreciation impact with mild diminutives. In sum, “ongoing tightening” that policymakers still envisage now has a longer timeframe than before.

Weakening expectations

On Thursday, this realisation lopped large chunks off market rate expectations. Only a 10% chance for a 25-basis point hike remained at June’s BoE policy, meeting, according to short-term rate futures. Probability implied for such tightening in August fell below 50% for the first time in weeks. Pessimism also increased on a rise in December with expectations down at 85% from 96%.

Thoughts on GBP/USD technical chart post-BoE news

Sterling’s test of its earlier four-month low resumed at last check with the current dollar-supportive environment helping tack on more speculative probes below. In fact, the base of sterling’s foray to the year’s initial post-referendum high was clearly January’s low, close to $1.3455, and not $1.3482 support that was corroborated last week. We expect the pound’s current floor to become increasingly porus.