Today the Bank of England published its latest Inflation Report which was perceived to be broadly positive as the central bank raised its forecasts for UK growth. In his opening remarks, the Governor said the recovery is not yet sustainable and outlined in forward guidance that the central bank will not raise interest rates until more spare capacity has been absorbed. Other broader measures will also be looked at when considering whether to tighten policy, including the unemployment rate. There was also emphasis on the lack of business investment growth and even when the bank does raise interest rates, the process was described to be limited and gradual as the economy still faces a number of headwinds.
Although the Inflation Report does not lay out a timeline for when interest rates will rise, the market has taken the bullish growth projections as a signal that tightening in Q2 2015 is likely. Lack of productivity has been a key issue for the central bank and they have become even more pessimistic about the outlook. Taking this in account, it is surprising that this hasn’t pushed back market expectations of monetary policy tightening.
Considering the fact that the unemployment rate dropped significantly faster than the BoE predicted, it is no surprise that the market is drawing its own conclusions. Until the central bank is successful in reiterating their commitment to low interest rates, sterling bulls will keep demand for the pound strong.
Sasha Nugent
Currency Analyst
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