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BoE hols rate, signals next move likely to be a hike

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 4, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet - The BoE today held its rate steay at a record low level of 0.5 per cent in line with broad market ecpectation. The MPC voted unanimously to hold rates steady with the lone hawk Ian McCafferty deciding to drop his demand for a rate hike. BoE governor Carney flagged weak global growth concerns stressing that slowdown in emerging economies led by China is impacting Britain’s economic progress despite the resilience shown by economy.

    He highlighted the risks arising from turbulent financial markets, capital outflowws and rebalancing of the Chinese economy. He noted that risks to Britain is rising. He noted "All of these developments pose downside risks to growth in the United Kingdom via trade, financial and confidence channels”. He particilarly mentioned that trade outlook looked grim “with net exports expected to drag on UK growth over the forecast period." According to the BoE, fall in the value of sterling by more than 3 percent over the past three months reflects global growth concerns, lower rates expectation and also the uncertainty that prevails with respect to Brexit.

    The current global economic situation demands central banks to adopt more accomodative policy. Loose monetary policy is the need of the hour as prices continue to remain depressed in the wake of low oil prices which has dropped 70 per cent from its peak in June 2014. Both BOJ and the ECB has cut rates into the negative territory.

    Forecasts slashed

    The central bank slashed inflation and growth forecasts. The BoE revised its economic growth forecast to 2.2 percent in 2016 and 2.3 percent in 2017, down from 2.5 percent and 2.6 percent predicted in November.
    Inflation, the central bank said will remain below 1 percent through 2016, longer than previously thought. However, inflaton is estimated to rise to just over 2 percent in two years' time, which is the same as the previous forecast.

    Next move to be a rate hike

    Britain has stayed ahead of the pack including other developed countries when it comes to annual growth. Even now when the UK annual GDP has come in at 2.2 per cent, lower than 2014 growth rate of 2.9 per cent, it is believed to have stayed ahead of other developed countries. There has been little spare capacity and a jobless rate has remained close to the long term equilibrium. These factors hint at a possibility of a rate hike some time in the near future. Carney mentioned that the bank’s next rate move will be a hike and not a cut. "We'll do the right thing at the right time on rates," he said. "More likely than not, the next move is up." He also said that the whole MPC supports the idea of a hike as the next move.

    Carney also added that the fall in the sterling seen recently, the resilience shown by the financial system and the solid consumption growth trend has rendered great support to the British economy. He thus feels that the domestic economy can stomach the impact of the declining global outlook.
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