The BoE can be expected to reiterate the need for low rates given the current scenario and the central will likely use the inflation report to justify its policy stance.
UK GDP grew 0.5 per cent quarter on quarter in Q4. Year on year, GDP grew 1.9 per cent in Q4, slower than 2.1 per cent growth recorded earlier. Annual growth came in at 2.2 per cent in 2015, after expanding 2.9 per cent in 2014. The Confederation of British Industry (CBI) showed that the UK economy expanded at a pace which is noted to be the slowest since May 2013 in the three months to January. CBI’s survey of manufacturers, retailers and the services sector indicated that the economy will show “modest†expansion in Q1 2016. Policymakers can thus be expected to slash their 2016 growth forecast to around 2.3 per cent from their November’s projection of 2.5 per cent growth. 2016 might be another year of slowing growth as emerging economies led by China continue to weaken and turmoil in the financial market rises. Carney acknowledges ‘The world is weaker and UK growth has slowed,’ he said.
Watch: Trade the BoE rate decision with FXStreet - Live Coverage
The weak global outlook has hurt UK’s manufacturers while the manufacturing exports have been hurt by the strong pound. Wage growth has been slow though the labor market has been noted to have strengthened considerably. Carney and the MPC members have time and again reiterated that the central bank will not raise rates unless wages rise on expected lines.
Lower oil on the other hand has kept prices in check, negatively impacting inflation. The oil slump is believed to compel policy makers to revise down their near-term inflation forecast. Minutes of the MPC’s January meeting revealed that the central bank believes that inflation measured by the consumer prices index, will increase “slightly more gradually†than its November forecast. Oil prices have also fallen 30pc since November. Inflation is thus currently being expected to rise to 0.5pc by “the early months of 2016â€Â
Given that low oil price is here to stay for some more time rise of inflation from o.2 per cent closer to the central bank’s inflation target of 2 per cent will take longer. Also, inflation can be expected to stay at its current low level “for several monthsâ€Â. The central bank’s quarterly inflation report can be expected to highlight the dismal price environment in the UK.
Researchers at Lloyds bank are of the opinion that “With the MPC's forecasts conditioned on a much shallower policy rate profile, a smaller inflation overshoot at the 3-year horizon than in November would send a dovish signal.â€Â
Carney has specifically that the global financial backdrop was ‘unforgiving’ and stressed that ‘now is not yet the time’ to raise rates. He went on to add UK’s exposure to the weakness in the global economy provides sufficient reason for the central bank to forestall the tightening cycle for now. Majority of MPC members are in agreement and supports low rates for now. The revision of forecasts for economic growth and inflation will shift rate hike further into the future.
Markets broadly believe that the BoE will hold rates steady throughout 2016. Howard Archer of IHS noted “The analysis and forecasts contained in the Quarterly Inflation Report, as well as the February MPC minutes, should offer further clues as to whether the Bank of England really is likely to hold off from an interest rate hike until 2017â€Â. He is currently of the opinion that the central bank will raise rates by 25 basis points only in November 2016.
Ruth Miller, an economist at Capital Economics observed that ‘A lower profile for growth and inflation over the next few quarters’ would write off rate hike expectations. “In contrast, a stronger medium-term outlook will suggest that markets are wrong to expect rates to stay on hold until well into 2017â€Â, Miller said.
The central bank’s decision will on one hand bring relief to families who are worried about the rise in mortgage costs. However, the decision to keep rates low at 0.5 per cent will hurt interest of UK’s savers who have lost out on substantial monetary gains n account of low rates for the last six years.
Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer. Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management. Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Recommended Content
Editors’ Picks
EUR/USD trades weak below 1.0800 amid Good Friday lull, ahead of US PCE
EUR/USD continues its downward trend for the fourth consecutive day, driven by a stronger US Dollar influenced by the hawkish market sentiment surrounding the Federal Reserve and expectations of prolonged higher interest rates.
GBP/USD: The first downside target is seen at the 1.2600–1.2605 zone
GBP/USD trades on a weaker note around 1.2620 during the early European session on Friday. The decline of Pound Sterling is backed by the growing speculation that the Bank of England will begin the rate-cut cycle this year.
Gold ends Q1 2024 at record highs, what’s next?
Gold is sitting at an all-time high of $2,236, lacking a trading impetus amid holiday-thinned conditions on Good Friday. Most major world markets, including the United States are closed in observance of Holy Friday, leaving volatility around Gold price highly subdued.
Ripple's move above this key level could trigger nearly 50% rally for XRP
Ripple price has overcome a critical resistance level and flipped into a support floor on the weekly time frame. This development happened while XRP tightly consolidated for roughly 250 days.
US core PCE inflation set to ease in February on month as Federal Reserve rate cut bets for June mount
The core Personal Consumption Expenditures Price Index is set to rise 0.3% MoM and 2.8% YoY in February. The revised Summary of Projections showed that policymakers upwardly revised end-2024 core PCE forecast to 2.6% from 2.4%.