Yesterday, the Bank of England’s Monetary Policy Committee voted by a majority of 7-1 to leave the bank rate at 0.25%, with Kristin Forbes being the only one in favour of an immediate hike in rates. The result came as no surprise as the vast majority of economists were not expecting to see any change in monetary policy.
In the inflation report the BoE said that sustainability of the current loose policy (low rates and QE) would to a “great extent depend on inflation expectations holding steady”. Some of the MPC members commented that they would give up their dovish stance relatively soon should they see any signs of an upside momentum in GDP or any further upticks in inflation which is currently above the bank’s ideal target level. However, lets hope their change in stance isn’t little too late…
The BoE also maintained its government bond purchase programme at £435B whilst continuing its corporate bond buying plan at up to £10B. Furthermore, they altered the UK’s economic outlook, slashing their 2017 growth forecast to 1.9% from 2%.
The Pound experienced a sell-off following the release of the inflation report and its fall was exacerbated by the bank’s assessment about household consumption, which it said is set to slow more than forecast in the near-term.
The Dollar strengthened late on Thursday as economic data offered signs that the labour market is holding steady and inflation is picking up in the U.S.
According to the Bureau of Labour Statistics, US producer prices rose 0.5% for the month of April following the preceding month’s 0.1% decline, surpassing analysts’ expectations for a moderate increase of 0.2%. On a yearly basis the Producer Price Index posted a gain of 2.5% in the reported month, the strongest increase since February 2012 compared to the 2.3% registered in March.
Rising inflation and a healthy labour market may give the Federal Reserve further cause to lift interest rates as early as June and potentially fuel the rates outlook, which would be supportive to gains in the US Dollar against its rivals.
In other news, the Saudi’s have announced that they plan to invest $40b in US infrastructure and China has agreed to open up its market to US credit card companies as well as resume imports of US beef. This will be part of “a package” seen as the first steps in redefining the trade relationship between the world’s largest two economies.
The Euro is steady this morning following yesterday’s gains versus the Pound.
German growth and inflation numbers released this morning have also helped as they came in as per market expectations.
The initial Gross Domestic Product figure for the Eurozone’s largest economy came in at 0.6% in the first quarter of 2017 and 1.7% Year over Year. Both releases were exactly as predicted by analysts.