Bank of England Monetary Policy

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Bank of England

The Bank of England meets today at 12GMT to review its monthly monetary policy. Expectations are rife that the BoE will leave the policy unchanged, keeping interest rates low at 0.5%. Just a few quarters ago earlier this year, there was rising speculation that the BoE would be raise interest rates sooner than the Federal Reserve.

A slowdown in the economy over the quarters fuelled by other risks such as the Scottish referendum dampened expectations. Towards the second quarter of this year, the speculation of interest rate hikes was pushed to spring of 2015, but this looks unlikely at the moment as well.

Latest PMI data for October showed a continued headwinds across the board with expectations now trimmed for a third quarter GDP to be revised lower to 0.5%. The preliminary GDP for Q3 2014 released late October was at 0.7%, lower from 0.9% growth in the second quarter.

Inflation and unemployment were the two key sectors of focus for the BoE’s policy making body. While inflation has flirted close to the BoE’s target of 2%, falling Crude Oil prices managed to ease inflation expectations, the last reading saw the UK’s CPI y/y fall to 1.2% after starting the year at 2% in January 2014.

The UK’s labor market has managed to improve however with unemployment rate ticking lower to 6% after spiking to an all time high of 8.4%. Despite the uptick in employment, the unemployment rate is still elevated from the 2008 crisis era. Meanwhile, slack in the labor market mostly stalled during this year which had been a point of concern for the BoE. At many occasions, BoE Governor, Mark Carney had hinted at an interest rate hike coming earlier than real wage growth, cautioning the public at large. The average earnings index however managed to tick softly higher at 0.7% after remaining stubbornly low near 0.5%.

The current economic conditions, especially in view of falling inflation gives the BoE enough time to wait for conditions to improve without an inflationary pressures. While growth has been stable for the region, there are significant risks posed from its neighbor, the Eurozone which is flirting with deflationary pressures. The ECB will also be meeting today at 1245 GMT with the press conference scheduled for 1:30PM GMT. The markets will be clearing focusing on the ECB’s press conference as recent Central bank actions, especially from the BoJ expanding its monetary stimulus puts pressure on Mario Draghi’s QE plans as well which is caught between an internal dissent with most of the Eurozone’s regional Central Bank vehemently opposed to the ECB purchasing sovereign bonds.

The British Sterling, which saw a stellar performance last year, has also taken a hit dropping close to 7.5% after surging to a high of 1.71 against the US Dollar. The Greenback, which has started its bull rally since the past couple of months continues to add downward pressure on the British Sterling, especially after the Federal Reserve ended its QE3 purchases, tapering the final $15 bn at October’s FOMC meeting.

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